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94th Congress, Second Session 


The report has not been officially adopted by the Subcommittee on General 

Oversight and Renegotiation and may not therefore necessarily 

reflect the views of its members 

Printed for the use of the Committee on Banking, Currency and Housing 



HENRY S. REUSS, Wisconsin. Chairman 


WILLIAM S. MOORHEAD. Pennsylvania 
THOMAS M. REES. California 

District of Columbia 
STEPHEN L. NEAL. North Carolina 
JOHN J. LaFALCE, New York 
LES AcCOIN, Oregon 
PAUL E. TSONGAS, Massachusetts 
BUTLER DERRICK, South Carolina 
MARK W. HANNAFORD, California 
DAVID W. EVANS, Indiana 
NORMAN E. D' AMOURS, New Hampshire 

ALBERT W. JOHNSON. Pennsylvania 
GARRY BROWN. Michigan 
JOHN H. ROUSSELOT, California 
STEWART P.. McKINNEY. Connecticut 
JOHN B. CONLAN. Arizona 
RICHARD T. SCHULZE, Pennsylvania 
HENRY J. HYDE. Illinois 
RON PAUL, Texas 

Paul Nelson, Clerk and Staff Director 

William P. Dixox, General Counsel 

Michael P. Flaherty, Counsel 

Grasty Crews II, Counsel 

Orman S. Fink, Minority Staff Director 

Graham T. Northup, Deputy Minority Staff Director 

Subcommittee ox General Oversight and Renegotiation 
JOSEPH G. MINISH, New Jersey, Chairman 

BUTLER DERRICK, South Carolina 
DAVID W. EVANS, Indiana 

Robert Loftus, Staff Director 
Jack Zackin, Counsel 

STEWART B McKINNEY, Connecticut 



October 20, 1976, 
To Members of the Committee on Banking, Currency and Housing : 

Transmitted herewith for use by the full Banking, Currency and 
Housing Committee and the Congress is a report by the Staff of the 
Subcommittee on General Oversight and Renegotiation, entitled 
Policies and Procedures of the Renegotiation Board: A Review of 
Selected Cases. The Report was prepared by William F. McQ.uilleii, 
Jack M. Zackin and Bernard Trescavage who was on temporary assign- 
ment from the General Accounting Office. 

I believe that the report will prove to be of utmost importance to 
Congress in its efforts to improve the renegotiation process. 

Joseph G. Minish 3 Chairman. 

Digitized by the Internet Archive 
in 2013 



Introduction 1 

I. The renegotiation process 1 

II. Screening operations 4 

III. Renegotiation of assigned cases 12 

IV. Untimely filings/data submission 31 

V. Workload statistics/court of claims actions 35 

VI. Hypothetical excessive profits 37 

VII. Other matters 40 

Appendix A. — Section 103(e) of the Renegotiation Act 43 

Appendix B. — Section 103(m) of the Renegotiation Act 43 

Appendix C. — Administrative Letter 75-15 44 

Appendix D. — Administrative Letter 75-8 46 

Appendix E. — Renegotiation Board Regulation 1471.1 and Bulletin No. 15_ 48 

Appendix F. — Renegotiation Board Regulation 1457.5 49 

Appendix G. — Selected Regulations of the Renegotiation Board 52 


CWA — Clearance without assignment 

DCAA — Defense Contract Audit Agency 

DOD — Department of Defense 

ERRB — Eastern Regional Renegotiation Board 

FTC— Federal Trade Commission 

FYE — Fiscal year ending 

GO CO — Government owned company operated 

IRS — Internal Revenue Service 

SIC — Standard industrial classification 

WRRB — Western Regional Renegotiation Board 




This Staff Study analyzes the renegotiation of selected cases com- 
pleted by the Renegotiation Board in fiscal year 1976. The cases se- 
lected for review included those that had undergone full-scale renego- 
tiation by the regional offices as well as those cleared without assign- 
ment (C.W.A.) in the headquarters screening operation. We selected 
five cases that has been C.W.A., three Class "A" cases (renegotiable 
profits of more than $800,000) cleared by both the Regional and Statu- 
tory Board, 11 Class "B" cases (renegotiable profits of $800,000 or 
less) cleared by the Regional Boards, and two excessive profit deter- 
mination cases. Our review of these cases, recent Board minutes, and 
other documentation resulted in a limited review of other cases as well. 
The report is divided into seven major sections, beginning with an 
overview of the general manner in which renegotiation is conducted. 
Other sections are devoted to the screening operation, the renegotiation 
of assigned eases. Board workload statistics and Court of Claims ac- 
tions, and the problem of untimely filings and data submissions. The 
sixth section, "Hypothetical Excessive Profits" is an accounting exer- 
cise which computes excessive profits for selected contractors based on 
FTC and IRS industry statistics, and compares these to the much 
lower excessive profit determinations actually made by the Renegotia- 
tion Board. The final section. "Other Matters" discusses in greater de- 
tail some important points raised briefly in the previous sections. 

_ Throughout the report, the staff has indicated its findings, conclu- 
sions and observations with respect to the cases reviewed, and to Board 
practices and policy in general. In several sections we have pulled these 
observations together under the heading "Conclusions." We believe this 
report documents the serious problems and short-comings in current 
Renegotiation Board practices, and points up the need for statutory 
and regulatory reform. 

I. The Renegotiation Process 

In the early stages of World War II, renegotiation was conducted 
on a contract basis. A standard percentage on contract price was em- 
ployed as the criterion for determining excessive profits. Renegotiation 
on that basis proved unwieldy, however, and the Renegotiation Act of 
1943 established a fiscal year basis for renegotiation. 

Section 105 of the Renegotiation Act of 1951 (the present Act) 
states : 

The [Renegotiation] Board shall exercise its powers with respect to the aggre- 
gate of the amounts received or accrued during the fiscal year . . . 

Renegotiation on a contract basis will be conducted, however, if re- 
quested by a contractor. 


Until recently, the Renegotiation Board interpreted Section 105 to 
mean that corporate structure must be viewed in the aggregate; that 
is. the parts were unimportant when the whole viewed by itself did not 
reflect excessive profits. This interpretation overlooked the fact that 
the emphasis on aggregate sales developed at a time when contractors 
were producing the same or similar products under several contracts 
at one or more plants. In 1951 when Section 105 was enacted, conglom- 
erate corporations manufacturing a diversity of products in a multi- 
divisional/subsidiary structure were virtually unknown. 

The language of the Act grants the Board broad powers with respect 
to the manner in which renegotiation shall be conducted. Product line 
or related types of analyses are not proscribed, nor does the Act dic- 
tate the manner in which review year losses/deficient profits among 
corporate segments are to be treated. Logically as the business and eco- 
nomic environment changed the Board's policy should have followed 
suit. The word "aggregate" in practice should be interpreted to mean 
bringing the results together after segmentation analysis since the 
efficiency, management, manufacturing process, economy in the use of 
materials, manpower and facilities can and do differ for each segment. 

As the Board's General Counsel pointed out in a recent opinion, the 
language of the Act and its legislative history, indicate that Congress 
intended to stress the recognition and reward for efficiency. Section 
103 of the Act directs that "favorable recognition must be given to 
the efficiency of the contractor." Xo mention of "favorable treatment" 
is made in regard to the six "statutory factors" listed in Section 103. 

To determine efficiency, the Act specifies that "particular regard" 
should be given to economy in the use of materials, facilities and man- 
power."' Thus, factors such as a decrease in the quantity of materials 
or the number of employees utilized in relation to production, and 
the reduction of waste would appear to be vital. The degree of economy 
differs, however, depending among other things, upon what types of 
products are being manufactured, the extent production is done in- 
house or subcontracted out. and the manufacturing process employed. 

When corporate segments, product lines or divisions are renego- 
tiated on a consolidated sales/profit basis, no attention can be given 
to the varying nature of the segments within the whole. An analysis 
on a consolidated basis, therefore, does not explore these essential 
ingredients of contractor efficiency in the detail necessary for its 
proper evaluation. 

The Board has argued that it has renegotiated contractors on a 
segmented basis. To some extent this is true in that the Board has ob- 
tained segmented data. The important consideration, however, is how 
adequately the individual segments were analyzed to insure that offsets 
were justified. A thorough analysis would recognize the different 
product-mixes, processes and efficiencies of each of the operations. In 
the final analysis, emphasis on overall corporate profit and the averag- 
ing effect has been routine Board policy and practice. The Board's 
Administrative Letter on Segmentation Analysis dated November 17, 
1975 does, however, recognize that relevant differences in each seg- 
ment can exist, and that segments need to be separately analyzed. It 
is still too early to judge the seriousness with which the Board is ap- 
proaching segmentation analysis. 

Treatment of Multi-Divisional Corf orations and Conglomerates 

The Board may renegotiate a contractor individually or as a mem- 
ber of a related group — so called "consolidated renegotiation." The 
Board also prepares "pro-forma consolidations-' whereby the consoli- 
dated group is renegotiated along Avith contractors that are related 
but not eligible for inclusion in the consolidated filing. This procedure 
is also known as "contemporaneous renegotiation." Contemporaneous 
renegotiation is also conducted in cases where the filings of related con- 
tractors cover slightly different periods and are, therefore, not per- 
mitted to be combined into one filing. Prior to FYE 1973, the Board 
also engaged in "concurrent renegotiation" in which related contrac- 
tors, filing separately, were aggregated by the Board itself. 

The effects of pro-forma consolidation are difficult to measure, in 
terms of the averaging effect. In a recent case the Board conducted a 
concurrent renegotiation which left the contractor with 13.5% return 
on sales overall, but higher returns on some segments. The staff be- 
lieves that separate subsidiaries of a pro-forma consolidation should 
all be treated separately without the averaging effect interplay. 

How the Board Renegotiates Contractors 

While renegotiation has changed from a contract basis to an aggre- 
gate fiscal year sales basis, the criteria used for determining the ex- 
istence of excessive profits may not have changed. The percentage of 
profit on contract price has apparently simply been replaced by the 
profit return on sales. As stated in a 1973 GAO report entitled "The 
Operations and Activities of the Renegotiation Board." a Regional 
Board official admitted that a rule of thumb is to allow large contrac- 
tors around 10% on sales and smaller contractors from 10% to 14%. 

Board regulations, however, specify that the amount of profit the 
contractor is allowed to retain shall be the controlling criterion. The 
rate of profit or a percentage of costs are not to be used as bases in the 
determination. Similarly, prior year settlements are not to be con- 
sidered as controlling precedents. Despite these regulations, both re- 
turns on sales and prior year settlements are of the utmost importance 
to the Board in the actual processing of cases. 

In making its determinations, the Board always cites return on sales 
figures. These figures are then compared to the returns on sales 
reflected in prior year filings of the contractor under review and simi- 
lar contractors. While returns on capital and net worth may also be 
cited, the same importance is not attributed to them. Board actions 
reviewed by the staff reveal that contractors are being C.W.A. even 
though returns on capital and net worth are well above industry 

The Board's reliance on return on sales calls into question its utiliza- 
tion of the statutory factors. Is the Board, for example, ensuring that 
proper recognition is given to the character of a contractor's opera- 
tions? This is questionable when one compares the Board's actions 
to industry returns on sales, capital and net worth as reflected in FTC 
statistics. These statistics demonstrate that complex manufacturing 
operations expect to realize greater return on sales than do simpler 

FTC statistics reveal the vast differences that exist among contrac- 
tors in different industries : 

77-950—76 2 

Sales (percent) Net worth 

Aircraft and parts, 

Primary metal industries 

Instruments and related products 

Miscellaneous manufacturing and ordnance. 

Apparel and other finished goods 

Petroleum refining 



















(FTC statistics are based on book income rather than taxable income. 
Renegotiation business is reported on essentially a taxable basis, re- 
flecting profits below those of book income.) Rules of thumb, without 
recognition of the type of industry, probably create advantages for 
some industries and disadvantages for others. 

Emphasis on the return on sales can, moreover, leave contractors with 
high returns on capital and net worth. Republic Corp., an instruments 
manufacturer, was left after refund, in FYE68 with returns on sales, 
capital and net worth of 14.6%, 53.5%, and 320.5%, respectively. 
FTC's Statistics for instruments contractors showed ratios of 15.3%, 
19.8%, and 31.5%, respectively. In clearing a recent case, the Board 
compared the contractor's returns on sales and net worth to the post- 
renegotiation returns of other contractors. AVhile the range of returns 
on sales was 10.6% to 14%, the range of returns on net worth was 
48% to 317%. 

Because of the subjectivity of the statutory factors, the Board has 
apparently used a rate of profit as a guideline in renegotiating con- 
tractors. Reliance on precedents was established when the Board began 
citing prior year settlements as a basis for reaching review year deci- 
sions. Today, decisions to C.W.A. non-war year filings are being based, 
in large part, on references to Board decisions in war year cases. 

In summary, primary emphasis on return on sales ratios and prior 
year actions creates a situation wherein the distinction between differ- 
ent types of contractors is probably not totally recognized, the effi- 
ciency of a contractor among all contractors is not fairly evaluated, 
and the reasonableness of profits among all contractors is not accu- 
rately judged. 

Matter for Consideration by the Congress 

The Congress may want to consider amending the Act to require 
the use of industry statistics along with the efficiency factor, as the 
basis upon which the Board will make its determinations of excessive 
profits. The other statutory factors could continue to be used for the 
purpose of positioning the contractor within the relevant contractor 
group and measuring the contractor's efficiene}^. 

II. Screening Operations 

The screening operation is the first stage of the Renegotiation proc- 
ess. The Board's Office of Accounting performs a cursory examination 
of a contractor filing and completes an RB-11 or Screening Report. 
Based upon information developed in this manner, the decision will 
be made to : 

— clear the filing, without assigning it to a regional office for full-scale renego- 
tiation, because it is felt that there is no likelihood of excessive profits. 

— refer the filing to a region for some further analysis prior to the final 
decision to clear the filing without assignment or to assign it for full-scale 

— assign the filing to a region for full-scale renegotiation. 

The screening procedure is guided by Administrative Letter 75-8 
entitled "Rules for the Screening of Filings at Headquarters, dated 
February 28, 1975. The letter discusses analysis in terms of the pro- 
priety of the filing (whether it is completed, signed, etc. and appears 
valid on the surface). Industry statistics must be obtained for returns 
on sales, capital and net worth (the Board uses FTC industry statis- 
tics source data). 

According to the letter, a filing will not be cleared if any of the con- 
tractors three returns (ratios) are above the appropriate industry 
ratios, without a statement on the RB-11 citing reasons for the higher 
acceptability. Similarly, in assigning a filing, the Office will make 
reference to the three ratios. 

Other factors to be taken into account in the screening operation 
are the presence or absence of Government assets, the turnover ratio, 
the amount of long term debt, and the ratio of net worth to long term 
debt. Prior year settlements with the same contractor are not specified 
as a basis for decisions to assign or clear filings. 

Loss Caivyfonvards 

Administrative Letter 75-8 also states that the screening report 
should indicate whether losses reported by the contractor have been 
verified for carryforward purposes. 1 The Renegotiation Act itself, 
however, Board regulations, and recent opinions by the Board's Gen- 
eral Counsel state that loss carryforwards will be examined to ensure 
they are not due to gross inefficiency and that the contractor has pur- 
sued available remedies for obtaining relief from such losses. 

Although none of these sources specify that examination of losses 
should be limited to cases assigned to the regions, this is, in fact, the 
procedure followed by the Board. Contractors who are cleared with- 
out assignment routinelv avoid close scrutiny of reported losses. Even 
the Eegional Boards' clearance notices (RB-82s), in fact, currently 
contain the following printed statement : "These data are not to be con- 
sidered as establishing actual loss, if anv, for future consideration." 
This can be interpreted as an admission that the Board has not deter- 
mined, to the degree necessary, that the amount of loss upon which it 
has made its decision is accurate. The possible consequence of the 
Board's failure to adequately examine losses in cleared cases will be 
discussed under the heading "Screening Decisions." 

In a legal opinion dated April 1. 1076. the Board's General Counsel 
states that 1o q s carryforwards, if justified, are applicable to the con- 
solidated contractor and are not to be allocated to a particular mem- 
ber, product line or segment. The General Counsel based his opinion 
on the fact that "neither the Act nor the regulations provide for the 
allocation of loss carryforwards to product lines or divisions." This 
overlooks the fact that the language of the Act was formulated at a 
time when consolidated renegotiation and conglomerate corpora- 
tions were unknown or in their infancy. In the staff's opinion, the 

1 See Appendix B 


Hoard should carefully analyze the question of applying loss carry- 
forwards to individual divisions or subsidiaries in order to ensure that 
current Board policy is consistent with the purposes of the Act. 

In a legal opinion dated May 6, 1976, discussing the legislative his- 
tory of the loss carryforward, the General Counsel points out that the 
1951 Act as originally passed by the House contained no such provi- 
sion. The Senate Finance Committee, however, concerned primarily 
with pro ruling relief to contractars for losses due to start-up costs, 
amended the Act to include a one-year loss carryforward. (The Board, 
through regulations later provided similar relief to contractors real- 
izing ''deficient profits'' due to start-up costs). The House accepted the 
provision in conference but insisted that losses due to gross ineffi- 
ciency not be carried forward since the intent of the Act was to give 
favorable recognition to efficient contractors. In light of this legisla- 
tive, history, it is interesting to note that the Board does not limit loss 
carryforward to start-up situations only. 

Segmentation Analysis 

Administrative Letter 75-8 "Rules for the Screening of Filings at 
Headquarters'' does not address segmentation analysis of the filing 
under the statutory factors. Administrative Letter 75-15, dated No- 
vember 17, 1975. however, which deals specifically with "Segmenta- 
tion Analysis", is by its own terms, applicable only to assigned cases. 
Thus, the breakdown and analysis of individual corporate segments 
is not a part of the screening operation. 

8c re en Ing D e cisions 

Board Regulation 1471.1 "When assignment is made" and Bulletin 
=£15 (1409.2-15), "Assignment or withholding of contractor's filings" 
set out the Board's policy of when contractors' filings may be cleared 
without assignment. The Regulation states : 

Xo assignment will be made when the Board can readily decide on the basis 
of the information contained in the Standard Form of Contractor's Report that 
the contractor has not realized excessive profits for the fiscal year and that no 
useful purpose would be served by making an assignment to a Regional Board. 

The Bulletin states that withholding of a filing signifies that the 
Board is satisfied the contractor did not realize any excessive profits 
for the fiscal year represented by the filing and that further proceed- 
ings are unnecessary. It also points out that as a result of the decision 
to C.W-A. the government and the contractor have been spared much 
time, effort and expense while the interests of the government have 
been adequately protected. 

As indicated above, the screening operation is only a cursory review. 
It is geared almost entirely to determine the likelihood of excessive 
profits and far less to ensure that amounts reported by the contrac- 
tors are accurate. This fact casts doubt on the validity of the Board's 
contention that the interests of the government have been adequately 
protected in the decision to C.W.A. 

In reviewing filings, the Board relies upon IRS and DCAA audits 
of the contractor in question. "While the Board probably should utilize 
these audits to support their own analyses, they are clearly not ade- 
quate for the Board's purposes. IRS audits are concerned with total 
business, whereas the Board must concern itself with sales segrega- 
tion/cost allocation between reneo;otiable/nonreneo;otiable business. 

DCAA audits are on a contract rather than a yearly basis, and may, 
in addition, not cover all renegotiable sales during the year. Prior year 
actions, such as claims settled, may also impact on the review year and 
the Board must be alert to these. 

The importance of an adequate review during the screening pro 
is exemplified by the following two cases : 

Susquehanna Corporation ( FYE 69 ) reflected an overall loss of 
$3,563,801). The case was assigned to the Western Region which ad- 
justed the loss to a profit of $221,65(>. The effect of the examination and 
resulting adjustment was to wipe out a potential loss carryforward. 

In Western (rear Corp. FYE 73, the Western Region adjusted re- 
negotiable profit upward by $1,292,040 and reduced prior year loss 
carryforward by $1,309,396. The loss carryforward years had been 
C.W.A. A significant factor in the Region's adjustment was the appli- 
cation of settled claims to the loss carryforward years, Although the 
screening rules state that the ''possibility of claims by or against the 
contractor will be . . . investigated'' the screening operation was ap- 
parently unaware of the claims when pending or settled. Only when 
the case was assigned did the claims come to light. 

These cases illustrate the short-comings inherent in the screening 
operation's exclusive concern with determining the likelihood of ex- 
cessive profits. The failure to ensure that amounts reported by con- 
tractors are accurate may allow contractors to claim unwarranted loss 
carryforwards in future years. Once a filing had been CAY. A., the pos- 
sibility of discovering adjustments to contractors' profit figures or 
the existence of settled claims is left to chance. 

Inconsistency/ of Board's Assignment Decisions 

The consistency and uniformity of screening decisions appears ques- 
tionable when one considers, as an example, the handling of the fol- 
lowing two cases : 

Air 3&me Controls Inc. FYE 9/30/74 submitted an I\B-1 on ."> ' 
19/75 covering a period of 38 days. Contractor's total sales were 
$1^46.000. Renegotiable sales and profits were $1,707 million and $9£ 
thousand respectively. Although all critical ratios were below relevant 
industry statistics tin 4 case was assigned to the Eastern Region. Few 
adjustments were subsequently made by the region and the filing was 

In White Consolidated Industries FYE 73 the parent company 
showed a profit/sales ratio of 30.6%. Two subsidiaries showed returns 
on sales of 1S.&% and 15.7% and another subsidiary showed a return 
on sales of 51.5% on its fixed price contract sales. The filing was cleared 
without assignment on the grounds that tin 1 dollar amount of the 
profits of the parent was small compared to the total profit, and the 
overall returns compared to industry averages and other contractors 
were "reasonable." 

Selected C.W.A. cases: 

Firestone Tire and Rubber Co. submitted renegotiable sales and 
profit data by six major product lines for FYE 7-\. Two of the six 
product lines reflected losses and the contractor showed a loss on the 
consolidated basis. Additionally, a loss carryforward of $2.6 million 
was available from four prior years, all of which had been cleared 
without assignment. The RB-11 (Screening Report) does not state 


whether the loss carryforward had been verified. The Administrative 
Letter requires such action effective 4/75, thus no such verification 
may ever have been performed on those losses. 

The reason for the loss in one of the product-lines was obtained 
from the contractor, who stated that the loss was due to changes initi- 
ated in production that obsoleted a large quantity of the work-in-proc- 
ess inventory. The Board did not determine who initiated the change 
(Government/contractor), whether the Government obtained a better 
product for the same price or whether the contractor had benefitted 
with an improved process at Government expense. The change con- 
ceivably could have resulted in an inefficient operation. 

One product-line, a munitions loading and storing effort that re- 
turned 4.1% on sales (and the only subsidiary in the consolidated 
filing) was a non-production, Government-owned (GOCO) effort. A 
comparison of this product-line to the contractor's prior year return on 
this line which was production oriented, and to similar contractors' 
returns on production oriented lines after determination by the Board 
and the Court of Claims showed the return to be about twice the 
others. (The Board reduced Remington's production lines to about 
2.5% in 1968 & 69, after refund determinations.) 

This case demonstrates the need to verify the loss carryforward and 
to explore the reasons for the review year losses before making a 
decision to C.W.A. 

North American Philips Corp. FYE 73 provided renegotiable sales 
and profits for each member of the consolidated group, by type of 
contract. The contractor showed a consolidated return on sales of 3.1% 
before the application of a loss carryforward. 

Prior years 1970-72 were C.W.A. FYES 70 and 71 had a loss 
carryforward of $2,426 million. FYE 72 reported a profit before the 
loss carryforward was applied. The RB-11 for FYE 73 does not state 
whether the loss carryforward had been verified. 

One member of the group reported a loss, but the Board did not 
obtain reasons or determine causes for the loss before offsetting it to 
more profitable operations. The amount of loss carryforward for years 
after FYE 73 is approximately $1.5 million. 

The Board prepared a pro-forma consolidation of the group and six 
subsidiaries that filed separately. The pro-forma statement reflected 
profit on the overall basis of 3.7% before the loss carryforward was 
applied to the consolidated group. 

Several members of the consolidated group and of the six subsidiar- 
ies showed rather high returns on sales. Whereas FTC statistics re- 
flected returns on sales of 7.9% certain members reflected returns of 
14.2%, 14.7% and 17.7%. Whether an excessive profit determination 
could have been made would depend upon verification of the loss carry- 
forwards and the reason for the review years loss of one member and 
the low profits of others. A verification was not made, however, nor 
were reasons sought. 

In justifying the review *year C.W.A. the Board relied in part on 
the clearance after assignment of Phillips' FYE 67 filing. The con- 
tractor's FYE 67 consolidated returns compared with FTC industry 
averages as follows : 



Net worth 

North American Philips 






The Board also based its C.W.A. decision on a comparison of Philips 
with FYE66-68 filings of similarly situated contractors. The returns 
shown by these contractors were all greater than the FTC ratios. The 
high returns in fiscal years 66-68 were perhaps justified by the fact 
that these were war years. In view of the statutory factors it would 
seem that a wartime contractor should be allowed to garner greater 
profits than a peacetime contractor if the efficiency and sales volume 
of the contractors are about the same for both periods. The Board's 
failure to consider the difference between war and peacetime periods 
casts doubt on the validity of comparison to previous years as grounds 
for decision. 

The RB-11 contains a notation that some adjustments were not pur- 
sued, apparently because of the low consolidated profit and the impact 
of applying the loss carryforward. The adjustments apparently re- 
lated to the total allocation of royalty income of $78,000 and admin- 
istrative income of $4,858,000 solelv to non-renegotiable business. The 
contractor reported, on the consolidated basis, renegotiable profit of 
$581,000 and the reallocation of that income, if warranted, may have 
had a significant effect upon the decision to assisrn or clear the filing, 
and upon the amount of loss carryforward available in future years. 

Remington Aimis Co., Inc. was a sole contractor — a DOD 100 con- 
tractor — whose business was almost totally a GOCO operation. Rem- 
ington reported a return on sales of 2.4% for FYE 73. 

The Board compared the review year to five prior years. The review 
year return was below that for four of the five previous years. A re- 
view of those five previous years (two refund/three clearances) shows 
remarkable differences. The contractor agreed to refund determina- 
tions for 1968 and 1969 provided the Board found no excessive profits 
for 1970 to 1972. The Board agreed. As a result/both 1971 & 72 reflect 
higher overall returns than the returns, after refund, in 1968 & 69. 
For FYEs 70 to 72, the ratios of the predominant GOCO sales all 
reflect higher returns than the returns, after refund, in 1968 & 69. 
The Board determined excessive profits in 1968 & 69 in the GOCO 
operations but offset significant amounts of the excessive profits by 
the low profits of non-GOCO operations. 

In the review year, the contractor showed a significant increase of 
General and Administrative (G&A) expenses over the prior voar. 
The Board disallowed $207,000 of the amount because DC A A had 
disallowed a similar amount. The amount allowed was still significantly 
greater than the prior year. The Board did not pursno the possibility 
that the contractor may have included the $207,000 in its filings, know- 
ing it had been disallowed by DCAA. For a similar contractor (Fed- 
eral Cartridge), none of the general and administrative expenses were 


allowed to GOCO operations. Thus, there is apparently an inconsis- 
tency in how G&\ expenses are treated for renegotiation purposes. 

A self-applied commercial article exemption in an amount of $45,- 
000 was approved during the review year. The exemption was justified 
on a number of items sold basis rather than use of the sales ratio basis 
as prescribed by the statute and regulations. 

The Board compared the review year to comparable contra ctors 
as a basis for arriving at its C.W.A. decision. In one case, the Court 
of Claims left the contractor (Mason & Hanger-Silas Mason, Co., 
Inc.) with return on sales on Army GOCO of 1.77%, 1.07% on all 
GOCO, and 2% on total renegotiate business. The Board showed that 
another contractor — ICI America — had been C.W.A. in 1972 and 73, 
with return on GOCO sales of 1.3% and 1.8%, respectively. 

The Board showed four fiscal years for another contractor — Fed- 
eral Cartridge. Remington's return on sales was below the returns of 
those four years. The four years were also handled as a package and 
certain inconsistencies are evident between the refund FYE 68 & 69 
and the cleared FYE 70 & 71. For instance, the contractor realized a 
return on sales, overall, of 4.1% in FYE 70 & 71 but was left, after 
refund, with returns of 3.2% and 2,8% in FYE 68 & 69, respectively. 
More importantly, the Board determined excessive profits to have been 
realized in the GOCO operation and left the GOCO operation with 
2.6% and 2.4%, respectively, after refund, whereas FYE 70 & 71 each 
showed returns of 4.1%. In FYE 69, the Board decreased the excessive 
profit determination significantly by offsetting a purported deficient 
profit of the non-GOCO operation. The effect of that offset Was to 
raise the return on sales of that non-GOCO operation from 7.9% 
to 12.4%. 

In summary, while the possibility of Remington having reaped 
excessive profits may be arguable, the decision to Hear the case seems 
less defensible. Knowing the outcome of a Court of Claims decision on 
a contractor with the same sales volume would seem to be reason enough 
to deviate from the historical reliance upon prior year settlements and 
return on sales and to assign the case for full renegotiation. 

Rohr Ivch'ztries* Inc. .filed on a consolidated basis with one sub- 
sidiary for FYE 73. Data on one small division was also provided. 
Contractor, overall, reported 1.7% return on sales. The four prior years 
had been C.TV r .A.« with losses in each year that amounted to a loss carry- 
forward to FYE 73 and beyond of $16,630,000. The RB-11 did not 
state whether- the losses had been verified for carryforward purposes. 
The contractor's non-renegotiable business has been continually profit- 
able. The RB-11 containd a statement that the cost allocations Avere 
not explained but were not worth pursuing because of the effect of 
the loss carryforward. (Cost reallocations in other cases that we 
reviewed accounted for significant adjustments to profit.) A down- 
ward adjustment of cost would have the effect of increasing the profit 
and although an excessive profit determination might not be made, 
the amount of the loss for carryforward purposes would be reduced. 

The Board obtained reasons from the contractor for losses on some 
contracts, but it did not appear to verify the accuracy of the state- 
ments or otherwise state they were valid ones for offsetting purposes. 
The efficiency /inefficiency of the operations was not explored. 

On termination claims, the contractor realized a profit of $226,000 
or a return of 64.4%. In prior years, the contractor had reflected losses 


and a low profit on such claims, yet the Board did not explore the 
reasons for the high returns on claims, because of the effect of the loss 
carryforward. (A question never raised in renegotiation, but one that 
perhaps should be, is whether such a high return should ever be com- 
pletely offset, even if some offsetting is warranted.) 

White Consolidated Industries filed on a consolidated basis and rene- 
gotiate sales and profits were presented for each member by type of 
contract for FYE 73. The Board cleared the contractor (C.W.A.) 
because the consolidated returns on sales, capital and net worth were 
below FTC ratios, and below the returns of similar contractors and 
the contractor's own prior years, after Board action. 

The contractor realized 4.1% on a consolidated basis. FTC reflected 
a return on sales of 8.6%. Three members reflected returns above FTC, 
one being 30.6%. One subsidiary reflected a return of 51.1% on its fixed 
price contract business and, when merged with its other businesses 
reflected an overall return of 8.2%. Reasons for the low profits of 
other subsidiaries were not explored before the offsetting occurred and 
the overall return of 4.1% was used as the basis for comparison to other 

The contractor was also C.W.A. in the three preceding years. In 
FYE 70, the consolidated return was 7.6%. 

The Board compared the contractor to similar contractors cleared 
by the Board. White's filing for FYE 73 was compared to other con- 
tractors' 1966 & 67 FYEs (wartime period). Rates of return permitted 
the other contractors ranged from 9.8% to 19.8% on sales, 19% to 
32.6% on capital and 31.9% to 114.5% on net worth. The FTC ratios 
( % ) for 1966 & 67 were as follows : 



Net worth 








As stated earlier in this section, the Board justified the high profits 
of some segments on the grounds that they were relatively small when 
compared to the total renegotiable profits, and the favorable com- 
parison of the consolidated returns to industry averages and to similar 
contractors. Reasons for the low profits do not appear to have been 
explored. Conceivably, inefficient operations may have been subsidized 
through the offsetting, at the expense of the profitable operations. It 
would appear such reasons should have been explored, especially when 
two operations realized the very high returns of 30.6% and 51.1%. 

The Board compares contractors, on an overall basis, to similar con- 
tractors or the contractor's own preceding fiscal years, but the compari- 
son only serves to limit review year work. Even if segmented analysis 
were performed, the results could be negated through such compari- 
sons. The Board announced its policy on segmentation analysis for 
assigned cases on 11/75 and any analysis in the past of either assigned 
or C.W.A. cases would most probably have been conducted on an over- 
all basis, without the reasons for losses and low profits obtained and 
explored for offsetting purposes. Thus, reliance on past returns is not 
at all well-founded. Similarly, prior year losses most probably were 
never properly examined for carryforward purposes and. therefore, 
should be scrutinized when applied in the review year. 

77-950 — 76 3 



The adequacy of the screening process, in terms of ensuring that 
excessive profits are not escaping, that the contractor's filing is ac- 
curate, and that the losses have been verified for carryforward pur- 
poses is questionable in view of the following. 

1. C.TV.A. decisions appear inconsistent when compared to other decisions to 
assign filings. 

2. Statements on whether losses have been verified for carryforward purposes 
do not appear on the Screening Reports. 

3. The policy on segmentation analysis applies only to assigned cases. Analysis 
in the screening operation is performed on an overall basis. Such analysis limits 
the amount of adjustments that may be made to renegotiate profits. Neither the 
efficiency of members nor the review year losses/deficient profits are adequately 
examined when analysis is performed on an overall basis. 

4. Supporting statements make reference to prior Board actions on similar 
contractors. However : 

a. peacetime and wartime renegotiable business is being compared, 

b. dissimilar sales volumes are being compared, 

c. reliance upon prior year Board actions and returns on sales assume that 
such analyses were adequate and that the efficiencies of the contractors are 

5. Little if any effort is made to verify the accuracy of reported sales/profit 

III. Renegotiation of xVssigned Cases 

The renegotiation of cases assigned to a Regional Office is the most 
in-depth of the examinations performed b}^ the Board. Even these 
examinations, however, can and do vary in degree, depending upon 
whether the regional accountant and renegotiator decide there is any 
likelihood of excessive profits. 

Regional decisions to clear or enter into refund agreements with con- 
tractors in Class "B" cases (renegotiable profits of $800,000 or less) 
are final. All Class "A" cases (renegotiable profits greater than $800,- 
000) and Class "B" unilateral order cases are reassigned to the Statu- 
tory Board for review. 

This section discusses the renegotiation of both Class "A" and "B' ? 
cleared and refund determination cases. We consider the depth and 
quality of the Board's examination of these cases and discuss the prob- 
lems or shortcomings in their processing. Finally, overall effects, 
shortcomings and problems are summarized and analyzed. 

Examination of RB-ls 

The degree of examination of filings differs significantly between 
the screening operation and full-scale renegotiation. The Board's 
examination of the filing in the screening process is a cursory one to 
ensure the propriety of the filing and to determine the likelihood of 
excessive profits. The regions' examination of assigned cases is in- 
tended to verify the accuracy of the sales segmentation and allocation 
of costs. The regional reviews sometimes result in significant adjust- 
ments to sales, costs and profits. 

The difference in the two operations is exemplified bv a November 17, 
1975 administrative letter entitled "Segmentation Analysis." Bv its 
own terms the provisions of the letter are applicable to all future 
assigned cases. Thus the detailed examination and analysis of corporate 
segments called for in the letter is not required in the screening opera- 
tion or in referrals to regional offices for further analysis. 

The letter is, in itself, interesting and important since it is the first 
attempt to explicitly state the manner in which segments are to be 


analyzed and i routed in terms of review year losses and deficient 
profits. (The Act, regulations, and guidelines are silent on this subject 
and the Board has been widely criticized for its reliance on consoli- 
dated sales and profit figures.) According to the letter, losses in the 
review year are to be examined to insure they are not due to gross 
inefficiency. Similarly, low profits are to be examined and reasons 
for them sought. If a loss can be justified, it will be allowed as an 
adjustment to high profits in another segment, in effect a direct reduc- 
tion of profits. Low profits, if justified would either receive considera- 
tion under the statutory factors, or be treated in a similar fashion 
as losses. The letter, like the Act and regulations, does not discuss the 
treatment of sales related to the losses/deficient profits, after adjust- 
ments have been made. It is. therefore, not clear whether, as lias his- 
torically been the ease, such sales will be included in the consolidated 
sales totals after adjustments are made. 

It is still too early to predict what effect the application of the re- 
quirements in the segmentation analysis letter, if conscientiously and 
properly applied, will have in future renegotiation proceedings. Actual 
experience will show how sales related to losses/deficient profits have 
been treated, as well as how thoroughly the Board is analyzing seg- 
ments and seeking justifications for losses/deficient profits. 


We selected three Class "A" cases and 11 Class "B" cases for review. 
Limited work was performed on one other Class "A" case, Standard- 
Thomas Corp., (FYE 73). 

Class A Cases 

Boeing Company (FYE 71), Rockwell International Corp. (FYE 
72), and Ambac industries consolidated with Packard Instruments 
(FYE 72) were recommended for clearances by the Regional Boards 
and cleared by the Statutory Board. 

Boeing Company filed an interim RB-1 that reflected renegotiable 
profits of $13,197,000 for a 1.7 c r return on sales. A revised RB-1 
that both the Board and coiitractor knew was forthcoming was sub- 
mitted because of adjustments to tax returns and special accounting 
agreement. Those adjustments at the Western Region increased the 
renegotiable profit to $30,475,500. The major adjustments were real- 
location of certain costs and expenses. In e;ffect, one reallocation of 
"other deductions'' based upon the ratio of beginning renegotiable 
capita] to total beginning capital resulted in $15,788,395 additional 
renegotiable profit. About $025,000 of interest income was offset to 
interest expense, increasing the renegotiable profit by that amount. 

The Region's Renegotiation Report did not comment on any pending 
or settled elaims. However, when the case was reassigned to the 
Statutorv Board, the Board learned that $13,307,000 in claims had 
been recovered and $0,821,000 was applied to FYE 71. Profit were 
further increased by that amount. Also, the Board increased both 
sales and costs by $0,252,477 related to termination expenses on a 
certain contract: however, there was no increase in profits in this 
instance. The contractor informed the Board that it had made known 
to the Regional Board the chaims settled at the time of the FYE 73 
filing and FYE 72 amended filing. The claims however had been pend- 
ing before that time, but the Region was unaware of them. 


Upon reassignment of the case to the Statutory Board, the then 
Office of Review requested these specific items, among others, be 
obtained from the contractor: 

— s^les. elements of costs, and profits by program, by types of contracts, by 
division. (Aerospace Group also by division and/or plants.) 

— Government and commercial assets by division and/or plant. 

— interest, claim recoveries and IRS adjustments similarly identified, with 
interest allocated based upon asset identification. 

(The Office of Accounting, about seven months prior to this action by 
the Office of Review, had queried the contractor about program/divi- 
sional data and had been informed by the contractor why it was 
unreasonable to use and rely upon such data.) The Office of Review 
took such action because the adjusted return on sales of 5% made the 
case, in its opinion, a borderline one. The case was returned to the 
Western Region where its accounting division was directed to obtain 
such data. 

The contractor complained about the long period of time the cose 
had been in processing — 18 months at headquarters at that time. The 
contractor consented to supply the data although it said the data was 
not normally maintained that way and may not be available at all. 
The contractor felt that profits were reasonable. 

Boeing apparently provided all data requested excenf cost of sales 
breakdown by division or plant. The contractor argued it was unable 
to provide a meaningful breakdown and that this particular matter 
had been discussed with the Board in the prst. Capital and net worth 
were provided by segments but the Board felt it was not suitable for 
use without further refinement. The Western Region apparently 
agreed with Boeing that it was a special case and data on a segmented 
basis would not be meaningful. Rather than request such data, the 
Board noted that the "worst" possible situation was considered for 
the contractor (and in the Government's favor) in computing amounts 
of renegotiable capital and net w T orth. 

The Office of Review obtained data compiled by the Western Region 
and then prepared its analysis. It recommended clearance based on 
its analysis of contractor's programs, comparison with prior year 
filings of Boeing and similar contractors, and comparison of the over- 
all returns on capital and net worth. The two similar contractors to 
which Boeing was compared were McDonnell Douglas and Xorthrop 
Corporations. Those contractors had been the subject of dissents by 
Board member Chase in a prior yenr. 

Responding to queries by Board members, the Office of Review 
commented that termination claims were for the convenience of the 
Government and that reasons for losses in one division were obtained 
from the contractor. Reasons for loss under another tvpe of contract 
in that division and losses and low profits under programs in the Aero- 
space Group were apparently not obtained. 

The Bonrd'S final opinion stated that divisions and/or Groups were 
individually evaluated. It considered the returns reasonable when 
compared to the level at which the contractor was cleared in the prior 
year and in comparison to the similar contractors. The following table 
shows that comparison : 


|ln percent] 

Sales Capital Net worth 







McDonnell Douglas: 

June 30, 1966' 

December 31, 1966 















After refund determination. 

The FTC and IRS reflect these ratios for FYE 71 

[In percent] 



Net worth 






_.. 3.9 


Although there was no loss carryforward to apply, the importance 
of adequately reviewing a large contractor with low profit or loss is 
demonstrated here where the profit increased significantly and would 
have adjusted such carryforward had there been one. 

Rockwell International Corp. reported renegotiate profits of $59,- 
800,000 for FYE 72 for a return on sales of 5.1%. capital of 11.3%, 
and net worth of 30.7%. FTC showed these returns at 4.0%, 4.2%, 
and 12.2%. respectively. The case was assigned to the Western Region 
in March 1974 and reassigned to headquarters in May 1975 as a recom- 
mended clearance. 

The Western Region requested the following data, among others, 
from the contractor : 

■ — summary of sales by products in a form similar to that of prior years. 

— discussion of the possible reallocation of a portion of interest expense solely 

to nonrenegotiable business. (Contractor had allocated interest income, 

dividends received and other interest expense solely to nonrenegotiable 

business. ) 
- — discussion of the use of divisional or product line data for determining 

renegotiable profits by categories. 

Certain other expense and income items were allocated wholly to either 
renegotiable or nonrenegotiable business. The balance was allocated 
on the cost of sales ratio. (In the Boeing case, the Board reallocated 
such income and expenses on the ratio of beginning renegotiable capi- 
tal to total renegotiable capital which resulted in an increase to 
profit of $15,788,395 or from about $13 million to about $30 million.) 
The Western region received renegotiable sales, total cost of sales 
and gross profits by major product groups. It obtained sales and 
profit py contract typo on the consolidated basis. Cost of sales break- 
down into materials, labor and overhead was apparently not provided 
on any type of basis. Capital and net worth were obtained onlv on 


the consolidated basis. The contractor convinced the Board that di- 
visional profit and loss data wore impractical to obtain. Rockwell 
had 10 divisions with renegotiable business. 

At this point it should be pointed ont that the Board has no policy 
concerning the reallocation of interest expense between renegotiable 
and non-rehegotiable business, the treatment of long-term debt, and 
the computation of capital and net worth used in renegotiable busi- 
ness. Contractors sometimes dictate to the Board how such items should 
be handled. On the interest expense issue the basis used by the Board 
in reallocating Boeing's interest expense resulted in a 15 million dol- 
lar increase in Boeing' *s profits. The basis used in the Rockwell case 
was different than that in the Boeing case. Partly because Rockwell 
was able to convince the Board that long-term debit could be identified 
to renegotiable business the Board did not pursue similar adjust- 
ments to RochwelVs profit. However, the final allocation of long term 
debt by the Board does not appear to support the full amount of 
interest expense charged to renegotiable business. This is because 
the ratio of long-term debt allocated to renegotiable business vs. total 
business is actually lower than the ratio of interest expense allocated 
by Rockwell to renegotiable business vs. total business. 

On the long-term debt issue, the Western Region's Division of Ac- 
counting had previously taken exception to the fact that McDonnell - 
Douglas identified debt to renegotiable business, reasoning that as- 
sets only could be specifically identified to renegotiable/nonrenegoti- 
able business and that the net worth should, therefore, be allocated on 
the assets ratio. The Western Board, however, accepted the contrac- 
tor's basis which resulted in a reduction of profit return on net worth 
from approximately 90% to approximately 60%. The specific identi- 
fication of long-term debt decreased the amount of net worth that was 
allegedly used in renegotiable business thus decreasing the return on 
net worth. 

In the Rockwell case, the contractor stated that long-term debt 
should be added to net worth to avoid distortions when comparing 
companies with differing debt-equity structures. It argued that a com- 
pany should not be penalized, in determining return on net worth, 
because it used debt instead of equity capital. In effect, the return then 
would be on capital employed. The situation reflects concern, similar 
to that expressed by McDonnell -Douglas* with the net worth factor. 

The region explored the possibility of computing returns on capital 
and net worth allocated to renegotiable business on the basis of Gov- 
ernment oriented and commercially-oriented operations (aerospace 
and electronics operations and automotive and industrial operations, 
respectively). The region did not pursue this breakdown accepting 
contractor's own explanation of why the breakdown was not feasible. 

The region had allocated beginning capital and net worth on the 
cost of sales ratio of the consolidated group. The region reduced the 
amount of the capital and net worth by the amount of the investment 
in subsidiaries and included one-half of the long-term debt on as- 
sumption it was used as a source of financing a portion of these in- 
vestments. The problem of arbitrary allocations is encountered when 
Government furnished assistance in the form of plant, equipment, 
materials and progress payments is significant and in fact finances the 
renegotiable business. The region did not explore the degree of utili- 
zation of Government-furnished property. There was no discussion of 


progress payments in the Region and only a passing reference in head- 
quarters. Thus, the extent of Government assistance was unknown and 
the capital/net worth employed in renegotiable business was not pre- 
cisely identified. 

The Western Region's Report of Renegotiation reflected a down- 
ward adjustment in renegotiable profit from $59,800,000 to $38,125,- 
000. The adjustments were made to price revision contracts per the 
Special Accounting Agreement. In effect, the downward adjustment 
was about $22 million. Our review of the files showed one schedule in- 
dicating such total adjustment but the degree of examination by the re- 
gional accountant was indeterminable. The initial RB-1 was based on 
book data whereas, under the Special Accounting Agreement, the 
Board attempts to match profit and cost with contract performance 
and moves sales into the period in which costs were incurred. In this 
instance, the Region decreased renegotiable sales and profits by $17,- 
743,000 and $21,675,000, respectively or 1.5% and 36%. 

The reviewer's comments supporting the recommended clearance 
cited performance reports which indicated the contractor was efficient. 
Overall returns on sales, capital and net worth were compared to prior 
years. One particular product-line however showed a gross profit re- 
turn on sales of 1^6.6%. No comment was made with regard to this high 

The Board had requested reasons for difference in the profit mar- 
gins between the review year and the prior year. The contractors at- 
tributed the loss in the Automotive and Industrial Products Group 

— abnormally high expenses incurred by a new axle plant in its initial opera- 

— loss sustained by a division on a contract. 

— the net total of other income (deductions) was a deduction in 1972 but in- 
come in 1971. 

—renegotiable sales were depressed because of the limitations imposed by the 
price escalation provisions of the sales contracts, which precluded the 
contractor from raising prices in proportion to escalating costs. 

The board did not question the validity of the contractor's explana- 

This Group had renegotiable sales of $70,358,000. In one submis- 
sion of data however, the contractor showed renegotiable gross profits 
of $6,069,000 on sales of $55,420,000 or 11% on automotive products. 
When the remaining $15 million of industrial products sales and re- 
lated costs and losses were included in the Group's totals, the Group 
finished with a loss. The Board did not obtain reasons for the losses 
and low profits in the Aerospace and Electronics Group which accoun- 
ted for most of the renegotiable business. 

Amhac Industries* Inc. filed on a consolidated basis with two sub- 
sidiaries for FYE 72. The case was assigned to the Eastern Region 
to examine the propriety of an abandonment loss. That loss was 
attributable to the contractor's decision to phase out of renegotiable 
business in one division. 

The Eastern Region requested and received divisional data in a 
form similar to that in the RB-1. The abandonment loss was per- 
mitted under Board regulation 1459.10 entitled "Costs incident to 
discontinuance of a renegotiable operation," and was permissible for 
IRS purposes. The Region performed little review of the loss, appar- 


ently satisfied with contractor's submission outlining the items both 
for renegotiation and tax purposes. Board regulation 1459.10 states 
that a portion of the costs of disposing of tangible property, the ori- 
ginal cost of which was deducted as an expense rather than treated 
as a capital expenditure (and depreciated) shall be allowed. The 
contractor, however charged losses of disposal of fixed assets. No 
comment was made whether the items had been expenced or capi- 
talized. The regulation does not specifically state whether such losses 
are allocable to renegotiable business. 

The phase-out was effective 12/31/72, with the losses and expenses 
occurring later. The loss was applied to the renegotiable business of 
FYE 72. 

The renegotiates recommended a clearance because returns on sales, 
capital and net worth were reasonable compared to industry statistics 
and prior year actions. He stated that although profits were high 
in one division, that division represented only 20% of the renegotiable 

The headquarters reviewer commented that the contractor should 
receive special consideration for risk because of the hazardous nature 
of materials used in the division to be abandoned. (The language 
relating to the "character of business" factor would seem more ap- 
propriate to support this reasoning.) FTC revealed a return on 
sales of 11%, and while the contractor realized 3.3% on a consoli- 
dated basis, two divisions realized returns of 15.9% and 18.2%. Disal- 
lowance of the abandonment loss would have left the contractor with 
about 6% on a consolidated basis. The zero and low profits of the 
subsidiaries and loss on operations of the division to be abandoned 
were not explored because of the effect of the abandonment loss and 
the resulting overall profitability when compared to the industry 
and prior years. 

Standard Thomson Corp. filed on a consolidated basis with Joseph 
Pollack Corp. for FYE 73. Both the Regional Board and the head- 
quarters reviewer recommended a clearance. When the case came be- 
fore the Statutory Board, decision was deferred for about six months 
to determine why the profits of Joseph Pollack had increased signifi- 
cantly in 1972 and 73 over 1970 and 71. The reviewer telephoned the 
contractor and obtained such reasons as: 

• — increased volume. 

— better budgetary controls, and 

— addition of new products and discontinuance of loss items. 

The reviewer used 1969 and a base year for Joseph Pollack and 
determined that sales had increased significantly in 1972 & 73 while 
total costs had decreased substantially. The reviewer however, did 
not determine whether the Government had received the benefit of 
lower unit prices. If such benefit should have accrued to the Govern- 
ment but did not. the regulations state that the benefit shall accrue 
through renegotiation. The Court of Claims took such action in the 
Mason Hanger-Silas Mason Co. case when it recognized that the bene- 
fit of lower prices had not accrued to the Government. 

The Director, Office of Review, had also recommended clearance, 
prior to the Board requesting the additional data. He stated it was 
his understanding that renegotiable/nonrenegotiable products of 
Joseph Pollack were similar and the contractor had earned abou*" 
the same return on sales on each. The regulations state the Board 


will consider the contractor's commercial business, among other con- 
siderations, as one factor in reaching its decision. 

The regional accountant, according to the reviewer, had verified the 
accuracy of the start-up costs which accounted for the loss carryfor- 
ward from FYE 70. FYE 72 had been C.W.A. when the FYE 70 loss 
carryforward had reduced that year's profit to zero. The accountant, 
for FYE 73, had apparently determined the loss was due to start-up 
costs, and as such allocable to future years. Upon reassignment of the 
case to headquarters, the reviewer prepared a breakout of the con- 
solidated filing on a divisional basis. This may have been the first 
time such a presentation was made. 

Finally, the comparison of FTC statistics to the contractor, on a 
consolidated basis, and Joseph Pollack alone showed the following: 

(In percent) 



Net worth 








Consolidated ._ 


Joseph Pollack 


Class B cases. — 

The 11 Class "B" cases were renegotiated by the Regional Offices as 
follows : 

"Western region: 

Air Borne Controls, Inc. FYE 74 

AVyle Laboratories FYE 74 

Evans Products Co. FYE 74 

Dayton Electronic Products Co., Inc. FYE 73 

Susquehanna Corp. FYE 60 

Western Gear Corp. FYE 73 

Eastern Region: 

Vincent Piro FYE 69 
Center Manufacturing Co. FYE 73 
Moore Business Forms, Inc. FYE 73 & 74 
Insilco Corp. FYE 71 

Air Borne Controls FYE 74 was assigned because a related com- 
pany had been assigned. The contractor had renegotiable sales and 
profits of $1,797,000 and $92,000. respectively. All returns were below 
FTC statistics. A refund determination of $2001)00 was made against 
the contractor in FYE 73 on renegotiable sales and profits of S2.333.000 
and $55bMQ. The return on sales was adjusted from 23.7% to 16.6%. 
In FYE 73, both renegotiable/nonrenegotiable products were similar 
and both had returns of about 24 %. Under the clearance cases previ- 
ously discussed, Joseph Pollack had been cleared because the ratios 
were the same. Air Borne was engaged in electrical cabling and 
ha messing. 

Wyle Laboratories FYE 74 reported renegotiable sales of $19,562,- 
000 and a loss of $225,000. The case was assigned, it appears, to check 
out exemptions erroneously taken and to verify sales seirreo-ation. 
Prior years 1968-73 had all been C.VY.A. and a loss carryforward 
from FYE 72 of $2,827,991 was available. The Western Region took 

77-950—76 4 


exception to sales made to the Bureau of Mines (not covered by the 
Act) and adjusted sales and profits to $16,996,736 and $410,261, re- 
spectively. The loss was thus converted to a profit, another loss for 
carryforward purposes was prevented, and the amount of the FYE 
72 loss carryforward that would have applied beyond FYE 74 was 
reduced. The region did not investigate whether the prior years that 
had been C.W.A. also had been charged with similar sales and losses. 
The region stated that there was no indication the loss carryforward 
was the result of gross inefficiency, but the file is devoid of data as 
to how that decision was made. 

Evans Products FYE 74 was handled contemporaneously with a 
subsidiary. Comparison of FTC and Evans as computed in the screen- 
ing operation showed the following : 



Net worth 








The subsdiary showed a return of 16.6% on sales of $709,000 and a 
profit of $117,000. 

While $2,633,000 of Evans renegotiable sales of $2,753,000 was con- 
ducted in one division the Board chose to allocate the contractors total 
capital and net worth on the ratio of renegotiable cost of goods sold 
to the compay's total cost of goods sold. It cannot be determined from 
the files whether that allocation would agree with those assets that had 
been employed by the one division. The contractor was cleared with 
adjusted returns on sales, capital and net worth of 12.1%, 21.4% and 
45.6%. The subsidiary's return of 16.6% was not adjusted. (The differ- 
ence in the return on net worth between the screening function and 
the Western Region was due to an incorrect calculation on the part 
of screening.) 

Dayton Electronics Products FYE 73 was a small contractor that 
reported renegotiable sales and profits of $2,385,538 and $403,758, re- 
spectively. The screening, function increased profit to $549,000, with- 
out any explanation. The case was assigned to check out claims against 
the Government and because returns on sales and capital were 23% 
and 66.3%, respectively versus FTC ratios of 7.8% and 10.8% respec- 

The Western Region reviewed the claims further and found review 
year sales included $1,030,538 of claims received for equitable price 
adjustment of two contracts and refund of $58,535 from the Navy for 
liquidating damages which had previously been assessed against the 
contractor. The profit of $403,758 which the contractor had reported 
was attributed to sales of $972,003 and included the $58,535 refund. 
The profit did not include any of the price adjustment. 

The price adjsutment, in effect, applied to prior loss years that had 
been C.W.A. In reality, the contractor's sales would be around the 
statutory floor, excluding the claims recoveries. 

The Region considered the profit as $403,758 and reduced the $1,- 
868,393 loss carryforward by that amount. The region said the carry- 
forward was not due to gross inefficiency presumably because of the 
successful claims settlement. The Region, however, did not adjust the 
carryforward by the amount of the claims recovered and conceivably 

(3, 563, 309) 


57, 030, 212 



(3, 830, 450) 


47, 700, 923 

(257, 918) 


397, 338 


2, 594, 827 

397, 388 


(276, 872) 



(64, 439) 


146, 625 


340, 020 

146, 625 



an amount of about $1 million may be erroneously carried forward to 
future years. 

Susquehana Corp. FYE 69 filed an RB-1 on 5/17/71 on an individ- 
ual basis. Assignment of the contractor was made on 11/8/72. The 
Board questioned why a consolidated filing was not considered. On 
6/8/73, the Board approved the contractor's request of 5/23/73 for 
consolidated renegotiation. The consolidated cases were reassigned to 
the Western Region on 3/26/75. In both the initial filings and the con- 
solidated, one subsidiary with sales and profits of $340,000 and $146,- 
625, respectively (43.1) was not included. The final consolidated filing 
including that subsidiary, was received in July, 1975. With regard to 
that subsidiary, the Statutory Board stated that renegotiation was 
commenced 2/13/74 and assigned to the Western Region on 9/30/74. 
The nonfiling of the subsidiary had not been discovered until the case 
had been assigned to the region. The contractor stated it assumed it 
didn't have to file because sales were below the floor. 

The consolidated RB-1 required significant adjustment as follows : 

Sales Profits Percent Sales Profits Percent 

Consolidated. 57, 248, 880 

Susquehanna 47,919, 541 

Brooks Res./Manufacturing 2, 594, 827 

Quadratec 8,989,319 

Digital Development Corp 340, 020 

i Loss. 

The table reflects high profits of two subsidiaries. More importantly, 
it reflects the fact that the consolidated loss was adjusted to a profit 
and thus a potential loss carryforward of $3,563,309 was eliminated. 

The renegotiator concluded Susquehanna and Quadratec suffered 
losses on substantial renegotiable sales, while Brooks and Digital both 
earned high margins of profit on combined renegotiable sales just 
under $3 million. Because on a consolidated basis the profit margin 
was only 0.4%, he concluded there was no likelihood of excessive prof- 
its. No performance reports were obtained except for Digital and cal- 
culations which would assist in evaluating reasonableness of costs and 
returns on capital and net worth were not made. The Western Board 
stated that in view of the very low profit on the consolidated basis, 
the clearance was issued. The Western Region asked the contractor 
reasons for losses on Susquehanna and Quadratec. The Regional Board 
relieved the contractor from reporting that data, however because it 
wanted to conclude the case. The Board experienced continual delays 
in obtaining data. 

^ Western Gear Corp. FYE 73 filed on a consolidated basis after ini- 
tially filing o)i an individual basis. The Screening operation increased 
the RB-1 profit from $6,009,961 to $6,301,000. The case was assigned 
because the profit, before loss carryforward, was high and to verify 
that loss carryforward. The contractor had a potential loss carryfor- 
ward of $9.r)85,907 from prior years that had been C.W.A. 

The Western Region asked the contractor the reasons for the losses 
in the prior years. The contractor explained that the economy was 
caught in a period of inflationary trends with sales volume defining 
faster than expenses could be correspondingly reduced. The contractor 


stated that profit suffered from provisions which recognized uncer- 
tainties as to inventory values, doubtful accounts and contract costs. 
Provisions of $1,316,800 were established for these categories. The 
contractor attributed the loss in the other prior year, in summary, to 
unforeseen technical problems and risks encountered in the items to 
be manufactured. Overruns on long-term contracts and additional 
development costs were written off. The contractor stated he had 
pursued available channels for recoupment of the loss but was un- 
successful in obtaining relief. The Region also requested and received 
reasons for losses in the review year. The degree of examination of the 
veracity of the reasons is difficult to determine from the file. The Re- 
gion did not comment on the contractor's reasons. Rather, it explored 
another avenue — the adjustment to the prior year losses and conse- 
quently to the loss carryforward. 

The Region adjusted the review year profit upward to $7,302,601. 
The largest adjustments resulted from claims settled of $859,074 and 
reclassified interest income as offset to interest income of $220,939. The 
loss carryforward was reduced from $9,585,907 to $8,276,511 due to 
reallocation of costs of $609,046 and claims settled of $700,350. The 
'Board had apparently not known of the pending claims until assign- 
ment of the review year. The Region did not comment upon the provi- 
sions the contractor had established for losses and apparentlv f a lt the 
reasons given for the losses justified offsetting. In reality, the Board 
adjusted the loss carryforward available to future years by $2,602,- 
036 because of the increase in review year profits of $1,292,640 and the 
decrease of $1,309,396 to the loss carryforward. 

The Region had discussed the feasibility of obtaining divisional 
data for the review year. The contractor stated that although it could 
be done, it would be a considerable undertaking for the review year, 
but that it would provide such data for future years. 

On the consolidated basis, the contractor realized return on sales 
of 16.2%, while the parent company with the bulk of the sales realized 
18.8%. On the consolidated basis, the contractor realized returns on 
capital and net worth of 32% and 67%, respectively. The Board did 
not compute these final returns because of the impact of the loss 

Vincent Piro FYE 69 is a manufacturers' representative earning 
commissions on sales of manufacturers' products. The FYE 69 filing 
was due 5/1/70. The Board finally received it 6/8/73, after repeated 
requests. The contractor argued that he had no renegotiable business, 
even after filing, but the Board discovered otherwise from tax returns. 
The Region attempted from 12/13/73 until 4/4/75 to obtain data and 
on that date received an unsigned revised RB-1. The agent was cleared 
on 1/16/76 with referable sales of $1,502,303 and commissions of $44- 
020.. a return of 2.9%. 

Center Manufacturing Co. FYE 73 was assigned because the Eastern 
Region so requested. The prior year was still open at the Region. Con- 
tractor showed returns on sales, capital and net worth of 9.5%, 20.1% 
and 24.6%, respectively. Total business was renegotiable with sales 
and profits per RB-1 of $3,647,000 and $346,000 respectively. The con- 
tractor was a clothing manufacturer. The Region adjusted profit down- 
ward to $334,958 and cleared the contractor with returns on sales, 
capital and net worth of 9.2%, 22%, and 19.6%. 


Moore Business Forms, Inc. (FYE 73 & 74) filed showing renegoti- 
ate sales and profits in FYE 73 of $4,540,000 and $421,000, respec- 
tively. The case was assigned with the notation that the past several 
years which had been C.W.A. showed losses on renegotiabJe business/ 
high profits on nonrenegotiable business. The notation stated that the 
allocation of costs and expenses should be carefully checked as should 
differences in the renegotiable pricing. The loss carryforward from 
1968-72 was $1,811,000. The contractor showed returns on sales, capi- 
tal, and net worth of 9.3%, 12.7% and 17.2%, respectively while FTC 
showed 8.6%, 12.8% and 23.3%, respectively. 

FYE 74 was assigned because of high profits. On renegotiable sales 
and profit of $10,968,000, and $2,083,000, respectively, the contractor 
reported returns on sales, capital and net worth of 19%, 34.1%, and 
46.1%), respectively. FTC reported 8.4%, 13%, and 24%, respectively. 

The Region requested and received detailed divisional data from the 
contractor for FYE's 68-74. Cost of goods sold was broken into ele- 
ments for each division. The Region decided to verify the loss carry- 
forward by telephoning the contractor, to be followed by written con- 
firmation, because of the (a) relatively low percentage of renegotia- 
ble volume, (b) favorable performance data, and (c) unlikelihood 
of enough adjustments to make it a refund case. 

The losses were said to be due to competitive Government bidding 
and the fact price levels were below those of similar commercial work. 
The Board did verify that t)m contractor, in the review year, was low 
bidder on some contracts. The contractor attributed profitable FYE 

73 & 74 operations to a reduction in Government discounts caused by 
a change in market conditions. Because of the application of the loss 
carryforward, both years were reclassified from Class "A" to Class 
"B" cases and the Region issued the final clearance notices. 

The Region did not discuss whether the significant increase in FYE 

74 sales and profits should have resulted in better prices to the Gov- 
ernment. Verification of the loss carryforward was apparently made 
by reviewing the divisional statements and by determining the con- 
tractor was low bidder on some contracts. No statement was made 
that the loss carryforward was not due to gross inefficiency. The con- 
tractor said that higher profits were due to higher prices charged 
because of the paper shortage, and higher sales due to market condi- 
tions, paper shortage, and growth of the company. The Region stated 
that favorable consideration should be .wen to the fact that non- 
renegotiable profits were considerably higher than the comparable 
renegotiable work. (RBR 1460.10b(2) states that nonrenegotiable 
profits should be considered in arriving at a final decision.) 

The loss carryforward reduced FYE 73 profit to zero and FYE 
74 to $678,473 on return on sales, capital and net worth of 6.2 r - . 15% 
and. 11.1%. 

Insilco Corp. filed on a consolidated basis reflecting renegotiable 
sales and loss of $8,366,000 and $177,930, respectively. The Screening 
review adjusted the profit upward by $143,000 to an adjusted Ios 
about ($35,000). The Western Region requested FYEs 70 & 72 
the review year (71) was forwarded for continuity. 

The Region adjusted the loss to $28,434. In arriving at that amount, 
the Region showed net downward adjustment of the loss of si '■'■ 
(upward adjustment of profit of $469,890 and downward adjust] 


of $320*394).'. The significant upward and downward adjustments 
represented reallocation of general and administrative expenses of 
$150,503, reclassification of adjustment from books to tax of $294,147 
and reclassification of research and development expenses of $308,618. 

The final opinion reflects rounded renegotiable sales and loss of 
$8,366,000 and $29,000. The business was produced by two subsidiaries, 
one with return on sales of 12.2% (sales of $3,940,000 and profit of 
$482,000) and the other with a loss. The Region asked the contractor 
to explain any substantial difference between profits/losses between 
review year and prior years. No explanation appears in the file, how- 
ever. The reasons for the loss were not explored. 

Contractor was cleared because of an overall loss and the belief that 
the profitable subsidiary couldn't absorb a minimum refund (10% 
return after refund) and still leave the company the profit it de- 
served. The potential loss carryforward was reduced from $177,930 
to $28,434. The Board indicated on its Clearance Notice Report (RB- 
82) that the data should not be considered as establishing loss, if any, 
for future consideration. Thus, the Board appears to be saying the 
loss hasn't been verified and justified for carryforward purposes. IRS 
apparently had some adjustments but the contractor stated it would 
contest them, and the Board did not pursue. The Board concluded 
that the contractor's operations were efficient. The Board compared 
the contractor to two prior years ; F YE 69 which was cleared by the 
Region reflected overall return of 13.2%, but an 18.2% on fixed price 
business. One company had a return of 25.9%. 

Excessive Pro-jit Determinations 

The Renegotiation Act states that the existence and amount of ex- 
cessive profits shall be determined through analysis of the contractor's 
renegotiable business under the statutory factors. Board regulations 
state the determination shall be made through an overall ^valuat^on 
of the factors and not by the application of a percentage of cost. The 
favorable/unfavorable determination will be reflected in the amount 
of profit the contractor is allowed to retain. The regulations also state 
that prior year settlements are not controlling precedents. 

As previously stated, however, the Board has primarily relied upon 
return on sales and prior year settlements/actions in reaching its de- 
cisions. Constant references, in all phases of the Board's operations, 
are made to these factors. Supporting documentation to new screen- 
ing proposals emphatically states that the Board historically has been 
oriented toward return on sales. 

The following discussion reflects our review of three excessive profit 
determination cases. 

John Wood Company was determined by unilateral orders to have 
realized excessive profits in FYEs 67 & 68 of $450,000 and $150,000, 
respectivelv. The contractor appealed the unilateral orders to the 
Court of Claims and offered to settle the $600,000 determination for 
$150,000. The Board advised the Department of Justice not to accept 
the offer. Another offer of $325,000 was made and the Board deferred 
the decision to Justice, based upon its judgment of risk in the case. 

After Justice received the case, several important events took place. 
First, a Government witness, aiding Justice, determined that renego- 
tiable profits were understated by about $400,000 for the two years. 
Secondly, the contractor argued that it was entitled to consideration 


for contribution to defense effort because of an engineering value 
suggestion it had made. 

The Board agreed with the rinding concerning the understated 
profits. While Board member Chase believes the excessive profits 
should be increased by $400,000, others feel the adjustment should 
not be so used, suggesting instead that the $325,000 settlement offer 
should be accepted. 

The contractor's claim of contribution to defense effort involves its 
design for inverted bomb fins. The issue is unclear because it has not 
been determined whether, as John Wood contends, the fins were re- 
sponsible for a cost-savings packaging design. 

This case demonstrates the degree of error and the questionable 
adequacy of the Board's examinations. Profits were increased 17.8%, 
from $2*206,000 to $2,599,000, as a result of Justice's invest io-ation. 

Rep^ihlic Corpus FYE 68 filing reflected renegotiable sales and 
profits of $8,846,592 and $1,424,884, respectively, on returns on sales, 
capital and net worth of 16.1%, 42.3%, and 135.7%, respectively. The 
screening report stated that officers' salaries had increased threefold 
from the prior year ($87,000 to $250,000 on a sales volume increase 
of about 65%). The case was assigned apparently because the profits 
were high, although no comparisons to industry averages or other 
comments were made stating reasons for the assignment. We found 
FTC reflected returns on sales, capital and net worth of 15.3%, 19.8% 
and 31.5%, respectively. 

The Eastern Region subsequently adjusted sales and profits to re- 
flect adjusted returns of 16.7%, 60.0% and 289.0% on sales, capital, 
and net worth respectively. The Region stated the officers' salaries 
were not unreasonable. (One officer was a non-employee of the com- 
pany.) Independent audit reports found significant amounts of unre- 
corded inventory, over valuation of inventory, and sales and profits 
recorded in the wrong period. The Region requested such reports 
from the contractor but it cannot be determined whether they were 
received, and if received how these issues were treated. 

The Region did not exclude appraisal surplus in computing re- 
turns on capital and net worth. If excluded, the returns would be 63% 
and 376%, respectively. The renegotiator determined excessive profits 
in the amount of $150,000. The contractor's argument that the profit 
was overstated because it had failed to properly charge material dur- 
ing the year was rejected because the contractor was unable to support 
that contention. The effect of the determination was to leave the con- 
tractor with 15.3% on sales and 259% on net worth. 

At the renegotiation conference in the Region, the Regional Board 
redetermined the excessive profits to be $70,000 in part because : 

— the contractor argued assets were understated as evidenced by the price 

Republic paid for Polan 31 days after this review year. The Board felt the 

originally calculated returns did not have the significance accorded them. 

Later at the Statutory Board, Board member Chase would learn that no 

audit was made of the purchase. 
— the contractor submitted non-auditable worksheets to convince the Board 

that non-recorded materials probably existed. Later at the Statutory Board. 

the contractor's contention was rejected and the consideration given by the 

Regional Board removed. 

The Eastern Regional Board left the contractor with returns on sales 
and net worth of 16.1%, and 273.5%, respectively. 


The Statutory Board's division assigned to the case brought up the 
issues of inflated value of stock and unrecorded materials. The con- 
tractor was referring to the latter as "residual materials" and arguing 
that by not costing these, profits were being overstated. The Board re- 
fused to accept this position. 

The Board also discovered a $262,000 discrepancy in inventory 
figures submitted by Republic to it and to the S.E.C. The Board ap- 
parently chose, however, not to increase profits by the amount of the 
discrepancy as it arguably might have done. 

The Board considered the contractor efficient even though delivery 
dates on certain major contracts were not met. The contractor at- 
tributed these delays to late delivery of government furnished assist- 
ance (tooling, etc.). 

The Statutory Board cited the fact the Government hadn't received 
reduced prices on the increased sales volume. The Region had not 
cited this as a reason for the excessive profits. The Board determined 
excessive profits of $225,000. leaving the contractor with returns on 
sales, capital and net worth of 14.6%. 53.5% and 320.5%. respectively. 
The Board rejected contractor'? offer to settle for $125,000. 

Chamberlain Corp. was handled as a package, in that FYEs 68-72 
were renegotiated together. The final opinion reflects excessive profit 
determinations for FYEs 68 & 69. while FYEs 70-72 were cleared. 

Before proceeding to FYEs 68-72. a brief discussion of FYE 67 is 
necessary since the operations of FYE 67 are referred to in the re- 
negotiation of subsequent years. FYE 67 appeared as follows : 

[Dollar amounts 

in thousands] 

Fixed price 










$2, 890 

$29, 584 

$58, 848 







The final opinion of FYEs 68-72 made reference to the fact that high 
profits of one plant in 1968 were partially offset by nonrecurring costs 
due to early stages of production in 1967. The plant was a GOCO 
operation for which the contractor had received several million dol- 
lars for plant reactivation and modernization. The Board's files of 
1967 and 1968 do not discuss the start-up costs in any way. The final 
opinion for 1967 concluded that although contractor's returns were 
high, profits and costs were reasonable in the context of all other con- 
siderations. The renegotiator had commented that excessive profits 
at the contractor's facilities were offset by the deficient profits at the 
Government-owned facilities. (See Remington and related cases of 
Federal Cartridge and Mason-Hnnqer on the issue of GOCO operation 
profits). The final opinion for FYE 68 also stated there were no de- 
ficient profits to offset to high profits as had been the case in FYE 67. 
The profitability of the contractor's FYE 67 was discussed by renegoti- 
ator and headquarters reviewer alike. 

Divisional sales and profit data were obtained for FYEs 68-72. 
For FYE 68, the renegotiator determined the excessive profits to be 


$2,000,000. A redetermination of $1,400,000 was subsequently made 
at the renegotiation conference, when the contractor submitted addi- 
tional data and responded to the first determination. The determina- 
tion was decreased because : 

— the product was redetermined to be more complex, 

— more consideration was given for risk in view of precontract material 

■ — partial consideration was given for contribution to the defense effort, and 
—New Jersey state use tax of $103,801 was applied to 1968. 

The contractor at one plant deferred start-up costs over the lives of 
contracts, and thus would not absorb such costs in one year. On the 
New Jersey tax, the contractor had a liability from 1967-72 but the 
review year was dropped from a negotiated settlement by the state. 
The Board, however, chose to allocate a portion of the tax from the 
other years to 1968 and thus directly impact on the refund determine - 

For FYE 69, the region adjusted contractor's profit upward $126,587 
by reallocating interest expense. By using divisional data, the region 
adjusted returns on capital and net worth from 29.6% and 73.9%, re- 
spectively, to 50.7% and 129%, respectively. The Eastern Region re- 
flected this breakdown of the contractor's business : 



Government owned 

Contractor owned 




Profit return on— 

Scranton Burlington 






Capital _. __ 

6.2 11.3 
33.0 92.4 
70. 4 268. 










Net worth 


The Region displayed IRS returns on sales and capital of 10% and 
13.8%. For FYE 68, the Rejrion showed returns on sales and net worth, 
after the Sl.-mOOO determination, of 8.5% and 140.4%, respectively, 
on an overall basis. The Regional Board recommended clearance on 
the basis of comparison to the contractor's FYEs 67 & 68 and to other 

FYE 69 was reassigned to the Statutory Board which redetermined 
that the contractor realized excessive profits of $1,000,000. It said 
profits on fixed price contracts were high at 12.1% and 13.3% but 
partially offset by deficient profits at the Xew Bedford operation. The 
Board said the low profits were attributed to purchasing in the prior 
year, old plant and equipment and using a new production process. 
The contractor had stated, however, that such start-up costs were de- 
ferred over the life of the contracts. The returns on sales and net 
worth, after refund, were 7.3%- and 114.2%, respectively-. 

The final opinion for FYEs 68-72 also stated that the operations of 
all plants were separately analyzed. 

The Board analyzed the contractor's returns on allocated net worth 
and capital on a divisional basis (except 1972) and on an overall basis. 
The returns were as follows : 


[In percent] 






New Bedford 


averages ' 



















































































1 Source : Quarterly financial report for manufacturing corporations, Federal Trade Commission, SIC No. 39, miscellaneous 
manufacturing and ordnance. 

The renegotiate sales and profits considered by the Board in these 
proceedings were as follows: 

[Dollar amounts in thousands] 






Sales ;_ 




$99, 703 

$65, 360 





Return on: 


Net worth 












The renegotiable profits for 1968 are $99,000 higher than those con- 
sidered by the Eastern Regional Renegotiation Board (ERRB), and 
the renegotiable profits for 1969 and 1971 are $157,000 and $60,000 
lower than those considered by the ERRB. These adjustments were 
made for the following reasons : 

(1) In the Board's opinion, in these eases the most equitable method of al- 
locating interest expense was on the basis of the contractor's assets employed 
in renegotiable and nonrenegotiable business rather than by the ERRB's method 
of allocating on the sales ratio, exclusive of sales recorded at Government-owned 

(2) Subsequent to the review years, the contractor was assessed $408,419 in 
use taxes by the State of New Jersey. On the basis of the contractor's settlement 
with New Jersey, this amount was repositioned to the contractor's fiscal years 
1969 through 1972, the years against which the assessments were made. 

The final opinion states that the Board found that in fiscal 1968, the 
returns on allocated net worth and capital were significantly higher 
in all four divisions and also on a total basis than the industry aver- 
ages. This was also true for the Waterloo and Burlington plants in 
the 1969 fiscal year, and since these plants contributed the bulk of the 
renegotiable profits, the total returns for that year were also high. 
The returns in fiscal 1970 were at a more reasonable level. The Scran- 
ton and Burlington plants' returns as well as the overall returns were 
found to be high in the 1971 year. Overall return were considered rea- 
sonable in 1972. 

The Board said recognition under RBR 1460.12(b)(1) for losses 
sustained in 1972 and 73, on an item produced from 1971-73, would 
be given in FYE 71 as special credit for the risk evidenced by this 
loss ($2.7 million). In essence, a loss carryback was effected liere. 
Favorable consideration was given also for pre-contract ordering of 


In fiscal 1968, profits on fixed-price type contracts were considered 
high in the Burlington plant at $1,475,000 on $13,216,000 of renego- 
tiable sales, or 11.2%, in view of the fact that the operations were -per- 
formed in a GOCO plant. Profits realized by the Waterloo plant at 
$4,235,000 or 15.87c of renegotiate sales of $26,857,000 were also con- 
sidered high because of the substantial proportion of equipment fur- 
nished by the Government. The New Bedford plant realized profits 
of $454,000 on $2,434,000 of renegotiate fixed-price sales, or 18.7%. 
The Board agreed with the contractor that the high profit on a rela- 
tively small sales volume was caused by costs that properly should 
have been charged off in this period but were not. The profits of the 
Scranton plants were considered reasonable. The Board also con- 
sidered that the contractor's profits of $907,000, or 6.1% of renego- 
tiate sales of $14,839,000 on cost-plus-incentive -fee contracts at the 
Burlington plant were high in view of the low risk of performing the 
operations in a GOCO plant under this type of contract. There were 
no profit deficiencies to offset the high profits as had been in the case 
in 1967. However, pursuant to the provisions of RBR 1460.10(b) (5), 
credit was given to the contractor for non-recurring costs in the early 
stages of production at the Burlington plant which partially offset 
the high profits in fiscal 1968. (Start-up costs were not discussed in 
FYEs 67 & 68. Contractor's treatment of snch start-up costs in FYE 
68 at the New Bedford division was to defer such costs over the life 
of the contracts. ) 

For the 1969 year the Board considered as high the renegotiable 
profits from fixed-price contracts at the Burlington and Waterloo 
plants. The renegotiable fixed-price sales and profits of these plants 
were as follows : 

[Dollar amounts in thousands] 




$21, 599 

$30, 595 




Percent _ — - . 



These high profits were partially offset by the profit deficiency found 
in the Xew Bedford operation which realized 2.9% on $20,817,000 in 
renegotiable sales under fixed price contracts. The low profits resulted 
primarily from the risk associated with contractor's purchase in the 
prior year of plant and equipment more than 15 years old which had 
not been in use for at least 10 years. In the year under review, the con- 
tractor devoted that plant and equipment to producing 155mm shells 
under fixed price contracts utilizing a process quite different from 
that which the contractor used in its Scranton plant. 

While the Scranton plant's renegotiable fixed-price profits were high 
in 1971 at $4,898,000 on renegotiable sales of $47,323,000 or 10.4%. on 
an overall basis, total renegotiable profits were considered reasonable 
in light of the factor consideration granted to 1971 under RBR 1 :'.'». 
12(b) (1) , as previously discussed. 

Overall, renegotiable profits in fiscal year 1970 were considered rea- 
sonable because the slightly high profits of the Burlington plant were 
offset by the low profits earned by the Xew Bedford plant. 


Renegotiate operations in fiscal 1972 resulted in modest profits or 
losses at all plants, and overall profits were reasonable. Loss carryback 
credit to I 7 YE 71, in the Board's view, resulted in reasonable profits 
overall. Specific reasons for the New Bedford F YE 70 low profits were 
not set out. In FYE 69, credit was given for start-up costs of FYE 08, 
even though the contractor had defewed such costs over the life of the 
contracts. Specific reasons for losses/low profits in FYE 72 were not 
explored because the overall situation was considerably below the other 

The contractor commented upon the Proposed Final Opinion 
(FYE's 68-72) on July 30, 1975. The Board responded to these com- 
ments as follows : 

1. Your position that the conclusion in the Proposed Opinion is incon-sist* itt 
with the prior year's clearance. Renegotiation is carried out on a fiscal year basis 
and a clearance in one year is not a precedent for action in a subsequent year. 
In addition to returns on capital and net worth, the Board considers the other 
statutory factors in making its determinations. 

(Contrary to what is stated, the Board looks toward prior year return 
on sales in reaching conclusions on review year operations.) 

2. Your contention that Government assets should be included, in the capital 
amount and the allocation of net worth. RBR 1460.11(h) (3) refers to sources of 
capital provided, but the calculations have consistently 'been made on the hasis 
of capital applied by the contractor, i.e., total assets as shown on the balance 
sheet at cost (less provisions) adjusted for assets not essential in the operations 
of the entity. The calculations have been made on this basis in order to recognize 
that the contractor should receive more favorable consideration for the capital 
supplied by it than for capital supplied by others, as set forth in RBR 1460.11 (b > 
(4). Proper comparison with published statistics can only be made by excluding 
assets furnished by others since these assets are not included in halance sheet 

3. Your position that SIC Group No. 3k is more closely related to Chamberlain's 
ordnance program than SIC Group No. 39. The Board has historically categorized 
ordnance producers, such as yourself, in SIC Group No. 39. However, the per- 
centages for SIC Group Xo. 34 are generally the same or slightly lower than those 
for Group Xo. 39. 

(Contractor's returns of capital and net worth still well above any 

4. Your statement that the comparison of a contractor with the average of any 
group is misleading. The Board's use of such returns is to show that, in years for 
which refunds are determined, such as your fiscal 1968 and 1969 years, the con- 
tractor's return are significantly higher than the industry averages. 

5. Your position that comparable contractors were left with higher returns. 
The Board's evaluations of all contractors are made under the statutory factors 
taking into consideration all known facts, including those pertaining only to the 
contractor being evaluated. 

(Board relies upon return on sales of other contractors for compara- 
tive purposes. The contractor here refers to those return on sales.) 

6. Your contention that price reductions in 1969 should be taken into con- 
sideration. The Board was fully aware that price reductions were made in years 
subsequent to fiscal 196S. The Board concluded that the contractor's pricing risk 
was less in fiscal 1969 than in fiscal 1968 due to its greater manufacturing experi- 
ence and better knowledge of actual costs. 

The Board stated that it was unable to discover in Chamberlain's 
letter of July 30, 1975, a substantive reason in any of the points raised 
to warrant a change of its findings of excessive profits. It therefore 
rejected an offer in settlement of $1,323,348. The Board then issued 
unilateral orders for 1968 and 1969 in amounts of $1,600,000 and 
$1,000,000, respectively, and cleared 1970-72. 


In summary, the renegotiation of Chamberlain's FYE 07 and 
FYE 68-72 reflected inconsistent and non-uniform consideration of 
the facts, and faulty logic in support of decisions. For instance, con- 
sideration was given for: 

— start-up costs from FYE 67 but no examination was made of such costs. 
(The contractor's policy appears to have been to defer such costs over the 
lives of the contracts. Also, the contractor had received several million dol- 
lars for plant reactivation and modernization.) 

— losses in subsequent years. (In effect, a loss carryback was allowed here 
although the Act and regulations do not provide for such consideration.) 

—risk due to pre-contract material ordering. (.The regulations state that actual 
experience reflecting losses either to the contractor or similar contractors 
should be cited when considering risk to the contractor. No such experiences 
were cited however. 

— New Jersey state tax liability. (The Board applied part of the liability as 
a direct reduction to the FYE 6S excessive profit determination even though 
the settlement did not include FYE 68.) 

The Region cleared FYE 69 based on a comparison to FYE 67 and 68 
whereas the Statutory Board determined excessive profits of $1,000,000. 
The Region based its decision on the overall consolidated returns 
whereas the Statutory Board based its decision on a divisional analysis 
of the contractor. The use of divisional data versus overall data had 
n significant effect on the returns on capital and net worth in FYE 60. 
The region adjusted returns on capital and net worth from 29.6% 
and 73.9%, respectively, to 50.7% and 129%, respectively, by using 
dhusional data. 


The Staff's review of assigned cases cast doubt upon the adeauacy 
of the Board's examinations of contractors' filings. The logic utilized 
by both the Regional & Statutory Boards is. at times, questionable in 
lisfht of documented facts. Moreover, inconsistent consideration of 
farts by the regions and by headquarters is often evident. We are 
led to conclude that in-depth Board examination of contractors' filings 
and data is often lacking. (This conclusion is borne out when one 
considers that significant adjustments to profits frequently made by 
the Court of Claims in its reviews of Board decisions.) 

Our review also revealed the lack of guidelines on the issues to be 
considered in renegotiation, as well as the lack of policy in the treat- 
ment of such important items as long-term debt, allocation of interest 
expense, and the computation of capital and net worth. The lack of 
policy guidelines places the Board at a severe disadvantage in dealing 
with contractors who have formulated their own positions on how to 
treat these accounting issues. 

Our review also confirmed the conclusions made elsewhere in this 
report concerning the Board's reliance on return on sales ratios and 
prior decisions. The policy of consolidating sales and profit figures 
•and offsetting losses/deficient profits without seeking justification was 
also apparent. 

IV. Untimely Filtxos/Data Submission - 

Contractors are required to file RB-ls 1 by the first day of the fifth 
month following the eloso of their fiscal years, unless they can show 
cause why an extension of time to file should be granted. The Board 

1 Standard Form of Contractor's Report for Renegotiation. 


has routinely granted such extensions when the IRS has granted the 
contractor an extension to file a tax return. In such cases, the con- 
tractor is required to provide proof that the IRS has granted the 
contractor an extension. 

The Board issued a General Order, dated April 15. 1975, stating 
that it will grant requests for extensions to file, if such requests are 
timely, in writing and good cause is shown. The Board will generally 
limit the extension to six months. Evidence of the IRS extension 
must be filed with the Board, and requests for more than six months 
must show, as one cause, that a hardship would be created if the exten- 
sion were not granted. 

The Renegotiation Act provides a penalty only for non-filing. A 
contractor that refuses to file after repeated warnings and years after 
the filing requirement would not be classified as a non-filer if it sud- 
denly submitted its RB-1 before the Board decided to conclude the 

Kuiwian Instruments Corp. was declared to be a recalcitrant con- 
tractor because the contractor refused to file for FYEs 66-70. even 
after repeated requests by the Board from 1968-70. In recalcitrant 
cases, the Regional Board issues unilateral orders in an amount deemed 
adequate to protect the interests of the Government. The cases are then 
reassigned to headquarters. In October 1971, headquarters began 
review of Kurman's unilateral orders and repeatedly attempted to 
obtain the filings. The filings were finally received in July, 1974. The 
Statutory Board thereupon rescinded the orders, deciding that there 
had been no willful misrepresentation by the contractor. The con- 
tractor's FYEs were cleared on the grounds that the contractor's 
profits were below the minimum refund. 

The following discussion relates other instances of late filing by 
contractors, including filings of Applications for Commercial Article 
Exemptions and submission of data requested by the Board. 

Late RB-1 Filers 

The following are examples of contractors who were late in filing 
their RB-ls : 

Chamberlain Manufaeturing Corp. — RB-1 for FY 70 was due 11/1/70 but 
the Board had not received it as of 3/23/71. On that date, the contractor, for 
the first time, requested and received an extension until 4/1/71. The filing was 
received 4/12/71. 

Rohr Industries, Inc. — RB-1 for FYE 72 was due 12/1/73. The Board informed 
the contractor on 12/19/73 of the contractor's filing requirement and on 
12/21/73 the contractor requested an extension until 1/15/74, stating that the 
IRS had granted an extension until then. The extension was granted. The RB-1 
was received on 5/2/74. 

Republic Corp. — ( suceessor-4n-interest) to Polan Industries — RB-1 for FYE 
68 due 5/1/69. Board granted three extensions until 10/1/69 because the con- 
tractor stated IRS had also granted extensions. The filing was received 1/2/69. 
For the short year FY 1/1/69 to 2/4/69. the Board emphatically stated that it 
would not grant an extension past 3/1/70. The RB-1 was received 5/2S/70. 

Susquehanna Corp. — RB-ls for FYE 12/31/69 on a non-consolidated basis 
were received 5/17/71. Such filings were clue 5/1/70. One subsidiary bad not 
filed. The Board asked the contractor whether a consolidated filing bad been 
considered, and the contractor subsequently filed on a consolidated basis. The 
subsidiary non-filer was not detected until the case had been assigned to the 
Western Region. Both the consolidated RB-1 and the RB-1 of the non-filing sub- 
sidiary were received in July. 1975. 

Vincent Piro. — RB-1 for FYE 12/31/69 of this manufacturer's agent was due 
5/1/70. The Board learned, from tax returns, that the agent was required to 


file an RB-1. After repeated requests by the Board, the contractor filed in 
June, 1973. The filing was incomplete. The Board requested another RB-1 to 
include all renegotiate business. The additional data was not received for over 
a vear. The revised RB-1 was apparently not signed. 

Insilco Corp.— RB-1 for FYE 12/31/71 was due 5/1/72. Contractor was late 
in filing, apparently not having requested an extension nor informed the Board 
of an IRS extension. Subsequently it informed the Board that IRS had granted 
an extension until 9/15/72 but requested and received an extension from the 
Board until 12/31/72. The filing was received 1/2/73. 

Late Applications for Commercial Article Exemptions 

In order that the RB-ls may be submitted in a timely fas]) ion. the 
Board requires that "Applications for Commercial Article Exemp- 
tions'' be submitted as soon after the close of the contractor's fiscal 
vear as possible, but in no event later than the first day of the fifth 
month following the close of that fiscal year. The Board must first act 
on these applications so that the contractor may adjust the review year 
renegotiate sales in his RB-1 by the amount of sales exempt from 
renegotiation. The following examples of requests by contractors to 
file untimely applications were recently aproved by the Board : 

The Carborundum Co.— FYE 12/31/75. Application due on or before 5/1/7G. 
Board approved the contractor's request 7/13/76. 

Michigan Seamless Tube Co.— FYE 10/31/72 & 73. Applications due 3/1/73 
and 74. Board approved requests 7/7/76. 

Seismic Engineering Co.— FYE 12/31/74. Due 5/1/75. Reqeust approved 

Cimco AY ire and ('able, Inc.— FYE 12/27/75. Due 5/1/76. Request approved 

Vishay Intertechnologif, Inc.— FYE 6/30/75. Due 11/1/75. Request approved 

Beehtel International Corp.— FYEs 12/31/72, 73 & 74. Due 5/1/73, 74, & 75. 
Request approved 6/29/76. 

Pacifi International Computing Corp.— FYEs 12/31/72, 73, & 74. Due on 5/1/73, 
74, & 75. Request to file approved on 6/29/76. 

The examples show that the requests are being filed well after the 
close of the contractors fiscal years. Conceivably, contractors are un- 
sure of what impact the Board's segmentation policy announcement of 
11/17/75 will have in renegotiating those fiscal years, and are anxious 
to exempt as many sales dollars as possible from renegotiation. 

Tardiness in Responding to Requests for Additional Data 

Once a filing is assigned to a Regional Office, a request (s) for addi- 
tional data is made to clarify and supplement the data in the RB-1. 
During our review, we noted that the Board is often more success- 
ful in obtaining data from the smaller contractors than from the larger 
contractors. If so, the operations of the smaller contractors are prob- 
ablv subjected to greater scrutiny than those of the larger contractors. 
We found instances in which the Board requests data, but the con- 
tractor ends up dictating to the Board the usefulness of the data, the 
manner in which it ought to be considered, or why it cannot be sub- 
mit |(>d. One reason such situations occur, is that the Board has no 
j^olicy on the treatment of long-term debt in computing capital and 
net Worth used in renegotiate business. 

Both Boeing Company and Rockwell International Corp. voiced 
strong objections to providing detailed data on a segmented basis. 
Boeing eventually came forward with far more data than Rockwell, 
although some of Boeing's data was not useful. Rockwell first in- 


formed the Board that before submitting the data it would have 
to study the impact of the Board's request. Rockwell eventually pro- 
vided the Board with data in a format best reflecting the contractor's 
position. The Board subsequently accepted this position. The situa- 
tion is analogous to a case discussed in the Joint Economic Commit- 
tee hearing on April 2, 1975, in which McDonnell-Douglas Corp. 
persuaded the Western Regional Board, to the consternation of 
the Western Region's Division of Accounting, to accept its method 
of computing capital and net worth. This method resulted in a sig- 
nificant decrease in the contractors' return on net worth. 

One of the most common adjustments made by the Board to re- 
negotiable profits is the reallocation of interest expense from rene- 
gotiable to non-renegotiable business. In the Boeing case, the Board 
increased renegotiable profits by about $15 million. Such adjustments 
are complicated, when, as in the Bockwell case, the contractor argues 
(and convinces the Board) that long-term debt can be traced to re- 
negotiable/nonrenegotiable business. 

The Boards' failure to formulate a consistent policy with respect 
to requests for data is illustrated by the following examples: 

At the Board's request. Chamberlain Cory, annually submits di- 
visional data. Rocl'ircll International, however, is asked to provide 
sales and gross profit data by major product groupings. Moore Busi- 
ness Forms. Inc.. a contractor with small renegotiable sales was asked 
to submit detailed divisional data for FYE 68-74, despite the fact 
that some of these years had already been cleared. 

In the Boeing case, the Board requested and received the contractor's 
reasons for some of the reported losses. In renegotiating Susquehana 
Corp.. the Western Region requested justification for losses, but sub- 
sequently relieved the contractor of its obligation to provide this 
data. In the Western Gear Corp. case, the Board requested reasons 
for prior year losses and, probably due to the response, adjusted 
the loss carryforward downward by i4%. 


The untimely submission of RB-ls and additional data by con- 
tractors reflects the lack of penalties for late filers, and the Board's 
historical reluctance to impose the Act's criminal penalties on non- 
filers. The need for civil penalties for both non-filers and later filers is 
clearly in evidence. The Board's approval of contractors' requests to 
submit untimely Applications for Commercial Article Exemptions 
demonstrates the Board's departure from regulations with respect 
to the filing requirements, and results in further delays in processing 
the RB-ls. 

On the treatment of accounting issues such as long-term debt, allo- 
cation of interest expense, and the computation of capital and net 
worth, the Board is sei^erely handicapped in its dealings with con- 
tractors because it has no policy on these matters. Consequent! v, the 
contractors, rather than the Board, determine how such items should 
be treated even when the items are critical in the renegotiation pro- 
ceedings. The staff believes that the protection of the Government's 
interests requires that the Board receive the raw data and decide the 
manner in which these issues are to be handled. The Board's difficulty 
in obtaining additional data suggests that civil penalties for con- 
tractors who refuse to comply with Board requests should also be 











V. "Workload Statistics /Court of Claims Actions 

The Board's estimated renegotiate sales backlog of $125 billion at 
6/30/76 is up from $105 billion and $88 billion at 8/31/75 and 2/28/75, 
respectively. The increase since 2/28/75 is about 42 c / ( . The breakdown 
of the $125 billion at the various operations is as follows : 


Western region $27. 6 

Eastern region 15.9 

Office of Financial Analysis 28. 7 

Screening 52. 8 

Total (estimated) 125.0 

The number of personnel at the end of fiscal years 1974-76 is as 
follows : 

1974 1975 1976 




Total 117 124 122 

1 Includes clerical personnel, whereas headquarters figures include line personnel only. 

The table shows that the number of personnel has fluctuated little 
over the years. 

The backlog at the end of each year was as follows : 

1974 1975 197& 

Screening 1,863 3,026 3,378 

ERRB 733 870 ~795 

WRRB 307 438 441 

Total, regions 1,040 1,308 1,236 

Office of Financial Analysis 336 411 4S5 

Referrals 8 3 50 

Over-age cases: 1 

ERRB 160 161 189 

WRRB 11 12 70 

Total 171 173 259 

i Assignment in process for over 24 mo. 

The table shows that the backlog in screening increased by 1.515 or 
81.3% since F/Y 74. In ERRB, the increase was 62 or 8.5% and for 
WRRB, 134, or 43.6%. Total increase for the regions was 196 or 
18.8%. Over-age cases increased by 29 or 18.1% at ERRB 59 or 536% 
at WRRB, totalling 88 or 51.5% for both regions. Referrals-cases as- 
signed to regions before screening; decision increased by A '2 or 5255? ■ 
At headquarters (Financial Analysis), the increase was 160 or 47. P> r r. 

The number of filings completed in screening has dipped sharply — 
down 865 or about 24%. 

The number of assignments completed bv the regional boards has 
increased by 168 (81.6%) at ERRB: 49 (24.4%) at WRRB; or 217 
(53.3%) for both Boards. The regional boards and headquarter's 
Office of Financial Analysis — may be processing primarily FYE 60's, 
as evidenced by the cases appealed to the Court of Claims in FYE 76- 


The number of completed referrals and headquarters review reas- 
Mgnments both decreased — referrals off 245.5% and reassignments 
off 4%. 

In F/Y 76, the ending backlog in screening increased by 352 or 
11.6%. At ERRB, it decreased 75 or 8.6%, whereas it increased at 
WRRB by 3 or less than 1%. It declined by 72 for both regions. 

In F/Y 76, referrals increased by 47 or 1566.7%. At headquarters 
review function, the increase was 85 or 20.7%. Over-age cases increased 
by 28 or 17.4% at ERRB ; 58 or 483.3% at WRRB ; and by 86 or 49.7% 
for both regions. 

General Counsel's backlog has risen from zero to 54 cases since the 
beginning of F/Y 76. The accounting and analysis sections of 
Financial Analysis (formerly Office of Review) experienced increases 
in F/Y 76 backlog of 23% and 19%, respectively. Headquarters (in- 
cluding General Counsel) experienced an increase of 140 cases or 
34.1%. Exemption operations also experienced an increase in backlog 
of 23 or 9.7%. The figures show that the beginning vs. ending backlog 
in all areas increased in F/Y 76, except that at ERRB. 

Workload and Status Report— FY E 76 

Based on the number of accountants and renegotiators, and on as- 
signments completed in FYE 76, ERRB accountants would have had 
13.4 cases per man and renegotiators 46.8 cases per man. WRRB ac- 
countants would have had 17.9 cases per man and renegotiators 62.5 
cases per man. (The assumption is made here that both accountants 
and renegotiators have worked on each case during the year.) ERRB 
accountants would have spent an average of 16.4 days per case and 
WRRB accountants 12.3 days per case. ERRB renegotiators would 
have spent an average of 4.7 days per case and WRRB renegotiators 
3.5 days per case. WRRB is regarded as having the more complex 
cases. (In actuality, wo assume that the more complex cases would 
take longer to process so that the time spent on less complex cases 
would be less than the average times.) 

Need for Additional Personnel 

The Western Board has stated that based on complexity of cases 
in the inventory, emphasis on case completion rate and backlog reduc- 
tion, five additional accountants and one additional renegotiator would 
be required. Chairman Broselow stated that he preferred de-emphasis 
of case completion rate (the goal set by headquarters) and backlog re- 
duction to hiring additional personnel. 

Chairman Johnson of the ERRB stated that no staff increase was 
necessary because the region had completed 374 assignments against 
the completion rate of 299 cases. That was done with 29 accountants 
and 8 renegotiators. 

Court of Claims actions 

In F/Y 76, the Board made 46 excessive profit determinations in an 
amount of $40,086,556 (after State but before Federal tax credit.) 

It concluded 21 by agreement and 25 by order. 

In F/Y 76, the Court of Claims handled 27 cases as follows: 

Dismissal/withdrawn 9 

Stipulated settlements 14 

Redetermined by court 4 


In the stipulated settlements, the court reduced the overall Board 
determinations by 81:8^ ($3,463,000 vs. $5,085,000). For cases redeter- 
mined bv the con' ft. the reduction was 7C>.:/ i ( $473,852 vs. $2,1 
Of the 19 cases filed with the court in F/Y 76, 18 were contractors? 
FYEs60s. The remaining case was a F YE 7*'. 

VI. Hypothetical Excessive Profits 

This chapter discusses the treatment of contractors, after refund 
determinations, as compared to FTC/IRS industry statistics. The 
basis for each set of statistics is significant in that IRS is based 
upon taxable income while FTC is based upon book income. Our pur- 
pose here is to show that the Board has allowed contractors, even on the 
overall basis, to retain profits well above their industry's average prof- 
its. If excessive profit determinations were based on the contractors 
being left with the industry's return on sales, those contractors would 
still be realizing several times the industry's return on capital and net 
worth. While it may be argued that the statutory factors have not been 
applied in this exercise and that such computations are thereby unfair, 
it can converse^ be argued that : 

1. the factors, to some degree, have been applied because like contractors 
(character of business) are being compared and the renegotiable/non-renego- 
tiable products are not always dissimilar or unique, ami 

2. there is strong suggestion that the excessive profit determination should lie 
somewhere between the industry average and the Board's determinations since 
the board's primary basis is return on sales whereas the industry reflects return 
on sales, capital and net worth. 

The following table compares industry statistics with the selected 
contractors* eon noil dated returns after final board action. • 

|ln percent] 


Profit to 


Net worth 


Boeing Co.: 

Final Opinion 



Refund determinations: 

Chamberlain Corp. (1968): 

Final opinion (after refund) 



Chamberlain Corp. (1969): 

Final opinion (after refund) 



Republic Sll to Polan Industries (1968): 

Final opinion (after refund) 

















The following tables reflect the results of renegotiation, in selected 
cases, if the contractors were to retain the industry's profit/sales ratio. 
Note that the contractor's returns on capital and net worth are always 
higher than the industry average after deducting the hypothetical 


Refund cases 


Profit to 

Capital Net worth 

Chamberlain Manufacturing Corp. (1968): 

Actual determination, $1,600,000: After refund return on 8.4 56.2 171.9 

Industry statistics: 

FTC (hypothetical excessive profit, $2,392,000) 7.6 12.5 24 

IRS (hypothetical excessive profit, $4,186,000) 5.8 15.2 28.4 

After refund reduction to equate to industry return on sales: 

FTC 7.6 50.9 155.6 

IRS 5.9 38.8 118.6 

Chamberlain Manufacturing Corp. (1969): 
Actual determination, $1,000,000: After refund returns on 7. 3 44. 9 114. 2 

Industrv statistics: 

FTC (hypothetical excessive profit, $1,117,000) 7.2 11.4 21.9 

IRS (hypothetical excessive profit, $3,073,000) 5.6 12.8 19. 

After refund reduction to equate to industry return on sales: 

FTC 7.2 44.3 112.7 

IRS 5.7 34.6 90.0 

Renublic Corp. Sll to Polan Industries (1968): 

Actual determination, $225,000: After refund returns on 14.6 53.5 320.5 

Industry statistics: 

FTC (hypothetical excessive profit, not computed because return 

higher than Board's) 15.3 19.8 31.5 

IRS (hypothetical excessive profit, $400.000) 10.5 16.2 27.7 

FTC (hypothetical excessive profit, not computed because return 
higher than Board's) 

After refund reduction to equate to industry return on sales: 

FTC (capital/net worth very high returns, but not computed) 

IRS 10.5 36.7 219.4 

Chamberlain Manufacturing Corp. (1971): 

Clearance 8.1 46.3 131.6 

Industry statistics: 

FTC (hypothetical excessive profit. $1,784,000) 6. 3 9. 1 17. 8 

IRS (hypothetical excessive profit, $2,081,000) 6.0 11.4 16.0 

After refund reduction to equate to industry return on sales: 

FTC 6.4 36.0 1C2.4 

IRS . 6.1 34.3 97.5 

Boeing Co. (1971): 

Clearance 5.0 14.6 44.7 

Industry statistics: 

FTC (hypothetical excessive profit, $14, 439,088) 3.2 3.6 10.4 

IRS (hypothetical excessive profit, $8,823,887) 3.9 3.4 9. a 

After refund reduction to equate to industry return on sales: 

FTC 3.3 9.3 28.6 

IRS 3.9 11.4 34.9. 

In hearings held before the Subcommittee on Priorities and Econ- 
omy in Government of tjie Joint Economic Committee on April 2, 
1975, two members of the Committee staff testified on the renegotia- 
tion of several cases of considerable controversy. In that testimony, the 
profitability of the contractors on a segmented basis was discussed 
and compared to industry statistics. Hypothetical excessive profits 
were similarly computed, but the results were more dramatic than 
the examples in this study because of the large size of the contractors. 
The purpose of presenting that data was to show the need for exami- 
nation by the Board on a segmented basis. The data reflected the very 
high profits of all segments and overall which the contractor was 
able to retain above the industry statistics. The data revealed how 
extremely profitable the contractors were, beyond the industr}', after 
final Board action. If one assumes that the Board's decisions were 
based on application of the statutory factors, one must also assume 
that a great deal of consideration was given to the apparent efficiency 
of those contractors beyond the industry as a whole. 

The staff of the Joint Economic Committee presented one table that 
reflected how much profit the contractor, on an overall basis, was able 
to retain beyond the FTC/IRS return on sales, capital and net worth. 
Each computation was individually computed and stands by itself. 
For instance, McDonnell Douglas (1967) realized $808 million above 
the FTC average as regards the net worth ratio. (The table follows.) 



[In millions of dollars) 

Sales Capital Net worth 

Final opinions: 

1967— McDonnell Douglas: 




1968— McDonnell Douglas: 




1969— McDonnell Douglas: 




Northrop Corp.: 




The staff presented another table reflecting that even if the con- 
tractors were reduced, on an overall basis, to the FTC/IRS return on 
sales, the contractors would still realize returns on capital and net 
worth several times the FTC/IRS averages. [The table follows.] 



















Percent profit of 




Net worth 

Final opinions: 

1967— McDonnell Douglas: 
















1968— McDonnell Douglas 













1969— McDonnell Douglas: 











Actual... . . ... ... 




Northrop Crop.: 















The Board's written response, in part, to the stafTs testimony — 
particularly to the above tables on hypothetical excessive profits — 
stated the following : 

— the statutory language permits no formulae or pre-established ratios to be 
used in determining whether profits are excessive on any given case, and 

— the statute, in part, speaks in terms of normal earnings, which is a term 
substantially different from the average earning of an industry in a particular 

The Board's response d'd not refer to its own use of the profit return 
on sales as the primary criterion, nor its reliance on prior Board actions 
with respect to the contractor and similar contractors. The Board did 
not define normal earnings. 


VII. Other Matters 

This section discusses and summarizes certain important issues and 
observations that were mentioned only briefly in earlier sections. 

"Parkage^ Renegotiation 

The Board has entered into agreements with contractors whereby the 
contractor will agree to a refund determination of one or more years, 
if the remaining years are cleared by the Board. Such arrangements 
were made with the following contractors : 

Chamberlain Corp— FYEs 68-72 

Remington Arms — FYEs 6&-72 

Federal Cartridge— FYEs 6S-71 

The consistency and uniformity of the Board's decisions in these 
cases is subject to question. In both the Remington and Federal Car- 
tridge cases, the years cleared by the Board reflect higher returns than 
the returns, after refund, of the excessive profit years. Furthermore, 
the GOCO operation returns in the cleared years are higher than the 
GOCO operation returns, after refund, of the excessive profit years. 
(The GOCO operations were those determined by the Board to have 
realized the excessive profits.) 

In the Chamberlain Corp. case, filings for FYE 71. on a consolidated 
basis and for one segment, were comparable to FYE 69 but the Board 
permitted risk associated with losses in subsequent years at another 
plant to be given special credit. Thus. FYE 71 was cleared. 

Xet Worth Factor 

The computation of the amount of net worth and the resultant re- 
turn on net worth are of the utmost concern to the large contractors. 
The Board, however, has no policy on how net worth should be com- 
puted. In the McDonnell Douglas cases, the Western Board accepted 
the contractor's method which resulted in a reduction of returns on 
net worth from approximately 90% to approximately 60%. The 60% 
range is regarded as a "safe" one for renegotiation. The "Western 
Region's Division of Accounting objected to the contractor's method 
and cited other more acceptable methods for computing the amount of 
net worth. 

Our review of the Boeing and Rockwell cases reflected similar con- 
cerns about the net worth factor. In the Rockwell case, the contractor 
was successful in getting the Western Board to accept its methodology. 

Percentage of Completion Accounting 

The percentage of completion method of accounting relates to con- 
tracts containing incentive provisions or providing for escalation re- 
determination or other revision of the contract price during or after 
the completion of performance of the contract. The intent of Regula- 
tion 1457.5 x is to permit compilation of more accurate estimates of 
costs and profits for matching profits with contract performance. The 
Board accomplishes this end by moving sales into the period in which 
the related costs were incurred. 

The reliability of the percentage of completion method and espe- 
cially the adequacy of the Board's analysis and review is highly 

1 See Appendix F. 


questionable. In a recent ease, the contractor admitted to having sig- 
nificantly understated profit for many years, including years that 
the Board h*j,d examined and cleared. Because of limited time, we did 
not explore whether similar situations have arisen or the degree to 
which the Board conducts examinations of these contractors. It ap- 
peared that in the Rockwell case, the Board accepted the contractor's 
amounts at face value. 

Short 'comings of Return on Sales of Prior Year Settlements /Actions 
as Basis for Review Year Decisions 
The shortcomings of using the returns on sales reflected in prior 
year settlements/actions in making review year decisions have been 
mentioned elsewhere in this report. Generally, they can be summarized 
as follows : 

— adequate review under the statutory factors of corporate segments and of 
the whole may he shortcut. 

— even if such adequate reviews were performed, they could he negated be- 
cause of the reliance placed upon those returns. 

— wartime and peacetime products are being compared. Logically, wartime 
products should probably be accorded more consideration. Thus, such com- 
parisons are not reasonable. 

— efficiency of the contractor may not be recognized and rewarded. 

— fair dealing among similar contractors and among all contractors may not 
occur because each contractor's capital/net worth input and resulting re- 
turns may differ and the Board would not recognize these differences. 

— even if only compared to the contractor's own prior years, the sales volume 
of each year must be regarded since larger volumes should result in reduced 
prices and lower returns. 

— the Act is shortcut when all of the above occur. 

Questionable Logic in Reaching Decisions 

The staff's review of selected cases revealed that Board decisions 
are frequently grounded on faulty logic. A lack of in-depth examina- 
tion was also evident in the Board's treatment of several cases. Two 
examples follow : 

In support of Chamberlain Corp.'s FYE 67 clearance the Board 
stated that GOCO profits were deficient because contracts were pri- 
marily negotiated at 8% but returned only 3.6%. The statement indi- 
cates that the Board merely assumed that the contractor was efficient. 
The statement also reveals the Board's emphasis on a rate of profit 
(which the regulations prohibit) and de-emphasis of renegotiation on 
a fiscal year, rather than a contract basis. Most importantly, the Board 
apparently overlooked the fact that the criteria for awarding profits 
on contracts during procurement and those used in determining ex- 
cessive profits are completely different. 

The Board also based its clearance on the fact that the contractor 
sustained unusual risks in accepting fixed price contracts in GOCO 
plants. In citing "risk" as a factor, the Board did not discuss losses to 
the contractor or similar contractors as required by the regulations. 
In fact, Chamberlain had actually profited overall on such contracts 
and received several million dollars for plant reactivation and mod- 
ernization. As is typical of Board procedures, the clearance ratios 
(capital and net worth) were high. 

In another recent case, high profits of one corporate division were 
attributed by the reviewer to efficiencies on large volume. Prices in 


this case had been negotiated during war years, while the work was 
performed over a period of war and peacetime years. The reviewer, 
however, did not question whether the contractor should continue to 
receive the benefit of such high prices in a peacetime economy or 
whether the efficiencies, through experience gained over the years, may 
ue rendering current profits excessive. 

In examining another division of the company, the reviewer agreed 
with the contractors reasoning that deficient profits were due to de- 
creased sales volume. He thus apparently overlooked the fact that one 
of the review years with lower sales volume actually reflected a higher 
return on sales than the years with greater volume. (Generally as 
sales volume increases, the profit returns should decrease). 


Appendix A 


(Excessive Profits. — The term "excessive profits" means the portion of the 
profits derived from contracts with the Departments and subcontracts which is 
determined in accordance with this title to be excessive. In determining excessive 
profits favorable recognition must he given to the efficiency of the contractor or 
subcontractor, with particular regard to attainment of quantity and quality 
production, reduction of costs, and economy in the use of materials, facilities, and 
manpower; and in addition, there shall be taken into consideration the following 
factors : 

(1) Reasonableness of costs and profits, with particular regard to volume 
of production, normal earnings, and comparison of war and peacetime 
products ; 

(2) The net worth, with particular regard to the amount and source of 
public and private capital employed ; 

(3> Extent of risk assumed, including the risk incident to reasonable 
pricing policies : 

(4) Nature and extent of contribution to the defense effort, including in- 
ventive and developmental contribution and cooperation with the Govern- 
ment and other contractors in supplying technical assistance ; 

(5) Character of business, including source and nature of materials, com- 
plexity of manufacturing technique, character and extent of subcontracting, 
and rate of turn-over ; 

(6) Such other factors the consideration of which the public interest and 
fair and equitable dealing may require, which factors shall be published in 
the regulations of the Board from time to time as adopted. 

Appendix B 


(m) Renegotiation Loss Carryforwards. — 

H ) Allowance.— Notwithstanding any other provision of this section, the 
renegotiation loss deduction for any fiscal year ending on or after Decem- 
ber 31, 1956. shall be allowed as an item of cost in such fiscal year, under 
regulations of the Board. 

(2 ) Definitions. — For the purposes of this subsection — 
(A ) The term "renegotiation loss deduction'' means — 
(i i for any fiscal year ending on or after December 31. 1956, and before 
January 1. 11)50. the sum of the renegotiation loss carryforwards to such 
fiscal year from the preceding two fiscal years : and 

(ii) for any fiscal year ending after December 31. 1958, the sum of the 
renegotiation loss carryforwards to such fiscal year from the preceding 
five fiscal years (excluding any fiscal year ending before December 31. 

(B) The term "renegotiation loss" means, for any fiscal year, the 
excess, if any, of costs (computed without the application of this sub- 
section and the third sentence of subsection (f » paid or incurred in 
such fiscal year with respect to receipts or accruals subject to the provi- 
sions of this title over the amount of receipts or accruals subject to the 
provisions of this title which were received or accrued in such fiscal 



year, but only to the extent that such excess did not result from gross 
inefficiency of the contractor or subcontractor. 
(3) Amount of carryforwards to 1956, 1057, and 1958. — For the purposes 
of paragraph (2)(A)(i), a renegotiation loss for any fiscal year (herein- 
after in this paragraph referred to as the "loss year") shall be a renegotia- 
tion loss carryforward to the first fiscal year succeeding the loss year. Such 
renegotiation loss, after being reduced (but not below zero) by the profits 
derived from contracts with the Departments and subcontracts in the first 
fiscal year succeeding the loss year, shall be a renegotiation loss carry- 
forward to the second fiscal year succeeding the loss year. For the purposes 
of the preceding sentence, the profits derived from contracts with the De- 
partments and subcontracts in the first fiscal year succeeding the loss year 
shall be computed as follows : 

((A) If such first fiscal year ends on or after December 31,, 1956, 
such profits shall be computed by determining the amount of the renego- 
tiation loss deduction for such first fiscal year without regard to the 
renegotiation loss for the loss year, 

(B) If such first fiscal year ends before December 31, 1956, such profits 
shall be computed without regard to any renegotiation loss for the loss 
year or any fiscal year preceding the loss year. 
(4) Amount of carryforwards to fiscal years ending after 1958. For the 
purposes of paragraph (2) (A) (ii), a renegotiation loss for any fiscal year (here- 
inafter in this paragraph referred to as the "loss year") ending on or after De- 
cember 31, 1956, shall be a renegotiation loss carryforward to each of the five 
fiscal years following the loss year. The entire amount of such loss shall be car- 
ried to the first fiscal year succeeding the loss year. The portion of such loss 
which shall be carried to each of the other four fiscal years shall be the excess 
if any, of the amount of such loss over the sum of the profits derived from con- 
tracts with the Departments and subcontracts in each of the prior fiscal years 
to which such loss may be carried. For the purposes of the preceding sentence, 
the profits derived from contracts with the Departments and subcontracts in any 
such prior fiscal year shall be computed by determining the amount of the rene- 
gotiation loss deduction without regard to the renegotiation loss for the loss year 
or for any fiscal year thereafter, and, the profits so computed shall not be con- 
sidered to be less than zero. 

Appendix O 


Administrative Letter 75-15 

Renegotiation Board, 
Washington, B.C., November 17, 1975. 
To : All professional employees. 
From : The Chairman. 
Subject: Segmentation analysis. 

Pursuant to a Resolution adopted by the Renegotiation Board on April 10, 
1975, you are herewith instructed to use the following described techniques in 
analyzing a contractor's renegotiable business. 


The grouping of a contractor's renegotiable business by types of contracts 
( fixed price, cost-plus-fixed-fee, etc.) as reported on the Board's filing Form RB- 
1, must be examined for similarity under the statutory factors, within each such 
group. With regard to contract-type grouping, where here is within one or more 
of such contract-type groups a marked lack of uniformity, the professional per- 
sonnel assigned to the case are required to consider how such contract-type 
groups may be segmented further so as to identify additional segments with 
greater similarity. For example, there may be within fixed-price renegotiable 
business a substantial amount of sales produced at facilities wholly or sub- 
stantially owned by the contractor as well as a substantial amount produced on 
government-furnished facilities. Clearly, there is a marked difference between 
the two groups with respect to the capital employed factor. Similarly, differ- 
ences may result from the character of the business ; such as the use of purchased 
materials versus customer-furnished material. Another examples of differences 
in character of business would be dissimilar products or services. 


Identification of the segments to be analyzed must be done with full knowledge 
of the nature of the particular contractor's cost accounting system and the 
availability of financial and other data. 

The word "segment (s)" means any significantly similar portion of a con- 
tractor's renegotiable business which will permit thorough analysis and the 
application of the statutory factors in a consistent and relevant manner. The 
segments so identified may be subsidiaries, product lines, profit centers, divisions, 
or such other categories. 

Having developed financial data by such significant segments, the remaining 
renegotiable business, if any, must be placed into a separate grouping which 
may not be similar, but by the application of reasonable judgement is an 
insignificant part of a contractor's renegotiable business. No further analysis 
of this grouping may be warranted or necessary unless this grouping shows a 

The analysis of each identifiable significant segment by application of 
appropriate statutory factor (s) must result (assuming profits in each instance) 
is a tentative finding that the profits are low, reasonable, or high (and if con- 
sidered separately would be held to be excessive. ) 

Low Profits 

Where it is found that certain valid circumstances have caused the profits of a 
significant segment (s) to be so low that recognition thereof is required, con- 
sideration shall be given to such low profits. The circumstances that cause such 
a finding as well as the favorable consideration accorded thereto, must be set 
forth in the appropriate Opinion, and fully justified. 

If no justifiable consideration can be given under the applicable statutory 
factors, then no credit will be given toward offsetting high profits with low profits 
for the purpose of making a final determination of reasonableness or excessiveness 
of profits. 


Where a loss is generated by one or more of the segments, within the same 
fiscal year, the amount thereof shall be allowed as an adjustment, in effect a 
reduction of profits, of significant segments for which profits are considered high 
(and would be considered excessive if considered separately). Losses must also 
be examined for reasonableness to make sure they are not the result of gross 

It is also acceptable to give consideration, in valid circumstances, for low 
profits as described above. 


Finally, wheen the foregoing analysis has been completed, all of the sales, 
costs, profits, and the factor considerations allowed the various significant seg- 
ments must be brought together — aggregated — along with the remaining group- 
ing, if any, and the statutory factors applied to the aggregate of the contractor's 
renegotiable business where such consideration has not already been given and 
where in the totality it may be warranted. This action culminates in a finding for 
the total entity of the presence or absence of excessive profits, and in the event of 
the former, the amount thereof. 

Reclassification of Class B Cases 

Where pursuant to these instructions, the loss of one segment is used to offset 
the high profits of another segment or where consideration has been given to the 
low profits of one or more segments, the Chairman of the regional board respon- 
sible for such a case is required to reclassify that case from "B" to "A" so 
that the Renegotiation Board may review such treatment. In those cases where 
an overall renegotiable loss exists, no reclassification will be necessary. Those 
instructions modify the Board's previous instructions dated January 14. 1075. 

This Administrative Letter is applicable to all future assigned cnses where 
segmentation is deemed appropriate in accordance with the Boards Resolution 
dated April 10. 1075 and this Administrative Letter. 

This Administrative Letter is also applicable to all assigned cases in process 
at this time. However, where cases are nearing completion, and in the judgment 
of the Regional Chairman and the appropriate Office Director, a segmentation 
analysis would not make a material difference as to the determination of excessive 
profits, if any, such an analysis may be omitted and a written justification for the 
omission shall be provided. 

C. Holmquist, 



Appendix D 

Administrative Letter 75-8 (Rules for Screening of Filings) 

Renegotiation Board, 
Washington, D.C., February 28, 1915. 
To : All employees. 
From : The acting chairman. 
Subject : Rules for the screening of filings at headquarters. 

An Administrative Letter of essentially identical text was issued by the 
Chairman of the Renegotiation Board on February 22, 1973. That Administra- 
tive Letter was revoked on May 13, 1974, in anticipation of a contemplated 

The revision of the Administrative Letter of February 22, 1973 has been delayed 
for reasons not directly connected with the screening process, and will continue 
to be delayed for an indeterminate amount of time. For this reason, it is deemed 
necessary to re-issue the Administrative Letter of February 22, 1973, with only 
such minor modification as may have been made necessary by the passage of 
time since the date of the original Letter. 

The screening process is a vital part of renegotiation activities and its proper 
functioning is of utmost, importance in carrying out the statutory mandate of 
the Board. 

The purpose of this Administrative Letter is to define the responsibilities of 
Board personnel engaged in the screening process as well as to indicate the 
minimal requirements, as regards both data and analysis, of an effective screening 

1. Upon receipt of a filing from the Division of Assignments, the Office of 
Accounting will complete line 11 of the Screening Report and will insure that 
the SIC number shown on line 8 is appropriate for the principal renegotiate 
products or services shown. In completing line 11. care will be taken that tbe 
descriptions, to the extent possible, will be in line with the terminology used 
by the Standard Industrial Classification Manual in use by the Board. Effective 
immediately the Board will use the 1972 edition of that manual. In completing 
line 11. as well as line 12, amounts will be shown whenever possible. 

2. In completing lines 13-23, the Office of Accounting will show the figures 
that are to be arrived at under the law, regulations, or orders, bulletins, or other 
internal rules or instructions of the Board. All adjustments required to be made 
in the contractor's figures will be made regardless of a judgment as to the effect 
of such adjustment on the ultimate outcome of the case. If the adjustment is 
reported in the file and reflected in the figures, such adjustment need not be 
noted on the Screening Report. 

3. Tbe "brief statement" required to be put on the Screening Report by 
General Order No. 2, paragraph 3a (4), whenever exception is taken to tbe 
method of sales segregation or of cost allocation, will contain an explanation of 
the problem as well as an estimate by that Office of the maximum amounts that 
may be involved in each potential adjustment. 

4. The Office of Accounting will give on the Screening Report a very brief 
description of the methods of sales segregation and cost allocation used by the- 
contractor, and the implications, if any, of such methods for renegotiation 

5. If for any one of the preceding three fiscal years the contractor's filing was 
assigned to the field for full-scale renegotiation or a referral, the central file will 
be obtained and the effect of adjustments in prior years on the current year will 
be noted on the Screening Report. If a prior year's filing is being processed in 
the field, the Office of Accounting will consult with the Director of the regional 
division of accounting with respect to the latter's findings, and the Screening 
Report, will so note. 

6. If a loss carryforward appears to be available for the fiscal year under 
review, the Screening Report will indicate whether the losses involved have, or 
have not. l>een verified for carryforward purposes. 

7. If the files indicate that Government-furnished facilities, equipment, mate- 
rial or progress and advance payments may have been available to the contractor 
during the fiscal year under review, the Office of Accounting will endeavor to 
obtain information regarding this Government asset input, and the information 
will be indicated on the Screening Report. The possibility of claims by. or against 
the contractor will be similarly investigated. 

8. The signature of the accountant and the initial of the Director, or Deputy 
Director, Office of Accounting, will be deemed to certify that the data on the 


Screening Report are adequate under the regulations, rules, orders or 

instructions covering the collection and verification of information and data Cor 
the screening process and, to the best of their knowledge, the data are accept- 
able for renegotiation purposes. 

!>. Upon receipt of the filing from the Office of Accounting, the Divisii 
Screening and Exemptions, Office of Review, will verify the informatio] 
tained on lines 11 and 12 and the appropriateness of the sic number on line . v . 
The division will then obtain industry financial statistics comparable to the 
and percentages to be used in evaluating the filing of the contractor in the 
screening process. Such ratios and percentages will be shown on the Screi 
Report, together with their source (FTC-SB€ Quarterly Financial Report for 
Manufacturing Corporations, Source Book of statistics of Income, JUS. or other). 
However, if the Screening Report as completed by the Office of Accounting shows 
a loss on renegotiable business and no exception has been taken by thai Office 
either to sales segregation or cost allocation, the presentation of this informa- 
tion may be omitted. 

10. For purposes of the screening process, industry financial (and other) 
statistics will be deemed to be comparable, even though they may relate to major 
industry groups. In the absence of governmental data, or in supplementing 
such data, non-government statistics may also be used, and in such cases statistics 
relating to appropriate major industries will again be deemed comparai a . 

11. No filing which shows any of the three critical profits ratios above the 
stated industry averages will be cleared without assignment, or recommended 
to l;e cleared without assignment, without a statement on the Screening Report 
as to the reasons for the acceptability of such higher than average ratios. Such 
statement will make reference, to the extent appropriate, to the consideration 
given to data shown on lines 10-23 of the Screening Report as well as to the 
presence or absence of Government asset input. 

12. The Division of Screening and Exemptions will consult the appropriate 
region whenever it is processing a tiling of a contractor who has a prior year or 
years pending in a region. Although such consultation may result in an advice 
by the region to clear or assign the tiring, such advice will not be used as the 
sole basis for the Division's action or recommendation, and will nor justify 
the omission of any steps or consideration normally called for in the screening 

13. If the Office of Accounting takes exception to or otherwise indicates reserva- 
tions as to the acceptability of a loss carryforward, the Division of Screening 
and Exemptions will evaluate the riling and will take its action or make its 
recommendation without regard to the loss carryforward. In this connection the 
Division may recommend referral of the case to a region for the purpose of resolv- 
ing the issues raised by the Office of Accounting with regard to the loss carry- 

14 If the Division of Screening and Exemptions believes that there may be 
excessive profits in a given case but such excessive profits do not exceed the 
applicable minimum refund, it will refer the case to the Director, Office of Review, 
and, regardless whether or not the case is processed under delegated authority 
(paragraph 4 c of G. O. No. 2), the Director will seek instructions from the 
Board as to the disposition of the case. The decision of the Board whether to 
assign or to withhold without assignment will be indicated as such on the Screen- 
ing Report. 

15. Xo assignment will be made to the regional boards without reference on 
the Screening Report to the relationship of the three critical profit ratios to cor- 
responding industry average and. to the extent appropriate, to the role of data 
on lines 19-23 and the presence or absence of Government asset input in arriving 
at the decision to assign. 

16. None of the above requirements will apply in cases of contractors whose 
volume of renegotiable sales is so low as to preclude the possibility of a mean- 
ingful evaluation. However, if comparative data are omitted for this reason, rhis 
fact, as well as the basis of the action taken or recommendation made, will be in- 
dicted on the Screening Report. 

17. The foregoing represent minimum requirements of an effective screening 
process. Over and beyond these, any consideration that may contribute to the 
decision as to the disposition of a case will be noted on the Screening Report, 
with factual supporting data as appropriate. 

IS. Whenever, under paragraph 4c of G. O. Xo. 2. Board approval is required 
for the clearance of a filing or. under paragraph 4 d of G. O. Xo. 2. Board in- 
structions are requested with regard to the disposition of a filing, the memo- 


randimi submitted to the Board under paragraph 4 f of G. O. Xo. 2 will contain, 
over and beyond the information prescribed by that subsection, all the informa- 
tion required by this Administrative Letter to be shown on the Screening Report. 
Alternatively, the Screening Report itself may be submitted to the Board in lieu 
of the memorandum. 

Rex M. Mattixgly, Acting Chairman. 

Appendix E 

Renegotiation Board Regulation 1471.1 and Bulletin Xo. 15 (Assignment of 
Contractor's Filings) 

§ 1471.1 When assignment is made. 

After recipt of a Standard Form of Contractor's Report from a contractor, the 
Board will assign the case to a Regional Board for renegotiation if it determines 
that further proceedings in the matter are warranted. (See Part 1458 of this 
subchapter. ) Xo assignment will be made when the Board can readily decide on 
the basis of the information contained in the Standard Form of Contractor's 
Report that the contractor has not realized excessive profits for the fiscal year 
and that no purpose would be served by making an assignment to a Regional 
Board. If the Board decides not to make an assignment, the Board will notify 
the contractor to this effect. See § 149S.6(c) of this subchapter. 
[17 F.R. 2541, Mar. 25, 1952, as amended at 21 F.R. 7443 Sept. 28, 1956; 26 F.R. 
9503, Oct. 7, 1961] 

§1499.2-15 Renegotiation Bulletin No. 15: Assignment or withholding of con- 
tractors' filings. 

(a) Section 1471.1 of this chapter sets forth the Board's general policy govern- 
ing the conditions under which, after a Standard Form of Contractor's Report 
has been received from a contractor, a case will be withheld from assignment to 
a regional board or will be assigned to such a board for further proceedings. 
This section provides in part as follows : 

Xo assignment will be made when the Board can readily decide on the basis 
of the information contained in the Standard Form of Contractor's Report that 
the contractor has not realized excessive profits for the fiscal year and that no 
purpose would be served by making an assignment to a Regional Board. 

(b) The purpose of this § 1499.2-15 is to explain this general policy and the 
similarity in nature and effect between a withholding from assignment and a 
determination after assignment that no excessive profits were realized. 

(c) Many filings are made with the Board by contractors whose renegotiable 
receipts or accruals for the fiscal year are below the statutory minimum or 
"floor." These filings of the Statement of Non-Applicability are optional (see 
section 105(a) of the act) and if not questioned, are set aside ; a contractor who 
is under the floor may not be renegotiated (see section 105(f) ). All contractors 
whose renegotiable sales for the fiscal year exceed the floor are required to file 
the Standard Form of Contractor's Report. These are either withheld from 
assignment or assigned to a regional board. 

(d) The withholding of. a filing signifies that the Board is satisfied that the 
contractor did not realize any excessive profits for the fiscal year represented 
by such filing, and that further proceedings are unnecessary. However, the as- 
signment of a filing to a regional board does not necessarily mean that a finding 
of excessive profits will be made for the fiscal year. 

(e) A filing is not withheld unless the Board ran readily decide, on the basis 
of the information furnished by the contractor, that the contractor did not realize 
excessive profits for the fiscal year. If such a decision can be made without 
assignment of the case, and without the detailed proceedings that may follow 
upon an assignment, it is obvious that the Government and the contractor have 
been spared much time, effort and expense, and yet that the interests of the 
Government have been protected. Contractors, therefore, in their own interest, 
may wish to include in their initial filings for a fiscal year information and data 
tending to demonstrate that their profits are obviously not excessive. 

(f) Whether a filing is withheld from assignment or a clearance is issued 
after assignment, the result is essentially the same. Both actions import that 
the Board is satisfied that the contractor did not realize any excessive profits 
for the fiscal year involved. In the one case, this conclusion is so obvious, in the 


opinion of the Board, from the information submitted by the contractor af 
headquarters, that further proceedings in a regional board are considered un- 
necessary ; in the other, the conclusion is not arrived at until after an examina- 
tion has been made by a regional board ; but in neither case is the contractor 
called upon to refund any of his profits. In short, in the one case the contractor 
is cleared without assignment ; in the other, after assignment. 

(g) When the applicable period of limitations has expired, the legal effect is 
the same in either type of case. That is, if the Board, having withheld from 
assignment, fails to commence renegotiation within 1 year after a filing for a 
fiscal year, or, having commenced renegotiation after assignment, fails within 
2 years after commencement to make an agreement or order determining exces- 
sive profits, then, in the absence of fraud or malfeasance or willful misrepresenta- 
tion of a material fact, all liabilities of the contractor for excessive profits for 
such fiscal year are thereupon discharged (see section 105(c)). 

(h) In order to make clear the essential similarity between a clearance deter- 
mination without assignment and a clearance determination after assignment, 
the Board has decided to employ a similar instrument to formalize an action 
of either type. The form of Clearance Notice Without Assignment and the forms 
of Clearance Notice After Assignment are set forth in § 1498.6 of this chapter, 
October 3, 1961. 

Appendix F 

Renegotiation Board Regulation 1457.5 (Treatment of Contracts With Price 

Adjustment Provisions) 

§ 1457.5 Treatment of contracts with price adjustment provisions. 

(a) Renegotiation status of such contracts. Certain contracts contain incen- 
tive provisions or provide for escalation, redetermination or other revision of 
the contract price during or after the completion of performance of the con- 
tract. Such contracts are subject to renegotiation unless otherwise exempted. 

(b) Allocation of price revision to fiscal year or years affected thereby — (1) 
Price revision allocable solely to fiscal year under review. If the price adjust- 
ment provisions of a contract apply to the receipts or accruals of the contractor 
solely in the year under review, the amount of such price revision will be deemed 
allocable wholly to the fiscal year under review. 

(2) Price revision allocable to more than one fiscal year. If the price adjust- 
ment provisions of a contract apply to the receipts or accruals of the contractor 
in more than one fiscal year, and if no special agreement shall have been made 
with the contractor for any other method of allocation, the amount of such price 
revision will be allocated to each such fiscal year as follows : 

(i) If the contract provides a method for such allocation, the allocation will 
be made in accordance therewith. 

(ii) If the contract does not provide any method for such allocation, the allo- 
cation will be made in such manner as the Board shall determine to be fair and 

(3) Price revision not disclosed in renegotiation of allocable fiscal year. Not- 
withstanding any other provisions of this section, if in the renegotiation of the 
fiscal year under review the contractor does not disclose to the Board either the 
occurrence or the possible future occurrence of an upward contract price re- 
vision relating in whole or in part to such fiscal year, the amount of any such 
price increase which is otherwise allocable to such fiscal year may be alio 

at the election of the Board, to the fiscal year in which the contract is modified 
to provide for such upward price revision. 

(c) When price revision precedes renegotiation. When, pursuant to the price 
adjustment provisions of a contract applicable in whole or in part to the fiscal 
year under review, the price payable by the Government to the contractor 
under such contract is decreased before the completion of renegotiation of the 
contractor for such fiscal year, the amount of such price decrease allocable to the 
fiscal year under review will be treated as a reduction of the renegotiable income 
of the contractor for such fiscal year, in accordance with the provisions of sec- 
tion 1481 of the Internal Revenue Code. When, pursuant to the price adjust- 
ment provisions of a contract applicable in whole or in part to the fiscal year 
under review, the price payable by the Government to the contractor under 
such contract is increased before tbe completion of renegotiation of the contrac- 
tor for such fiscal year, the amount of such price increase will, notwithstanding 


the provisions of §§1459.1 (b) (1) and 1466.4 (c) (2) and (3) of this sub- 
chapter, l;e included in the renegotiate income of the contractor for the fiscal 
year under review in order properly to reflect the renegotiate income and profits 
of the contractor for such fiscal year. 

ul i spccal treatment required when renegotiation precedes price revision — 
( 1 i Refund as, g. , \ > if it is anticipated, pursuant to the price adjustment pro- 
visions of a contract applicable in whole or in part to the fiscal year under re- 
view, that the price payable under such contract will be retroactively increased 
or decreased after the completion of renegotiation for such fiscal year, the amount 
of such anticipated price revision will be estimated and adjustment will be 
made as hereinafter provided for any portion thereof which is determined 
to be allocable to the fiscal year under review pursuant to the provisions of 
paragraph (b) of this section. 

<ii) In any case in which an agreement is made for the elimination of exces- 
sive profits, if a retroactive downward price revision is anticipated, the con- 
tractor will be permitted to set up a reserve to cover the refund of the portion 
of the estimated price revision which is allocable to the fiscal year under review 
and to charge the amount of such reserve against renegotiate business for such 
fiscal year: Provided, That if the amount of such reserve is substantial, there 
will be included in the renegotiation agreement a clause providing that, in the 
eveiu the final downward price revision is le^s than the amount of such 
reserve, the difference between the amount of such final price revision and the 
amount of such reserve shall be deemed to be additional profits for the fiscal 
year under review to be eliminated pursuant to the act. As used in this section, 
the word "reserve" refers only to the amount agreed upon and allowed to the 
contractor at the time of renegotiation as a provision for reasonably anticipated 
net downward price revision under contracts containing price adjustment pro- 
visions, irrespective of any provision the contractor may have made on its books 
for such purpose ; the reserve is the amount by which the aggregate of the 
amounts accruable before adjustment for price redetermination exceeds the 
amount used for purposes of the renegotiation agreement as the receipts or 
accruals of the contractor under such contracts. 

(iii) In any case in which an agreement is made for the elimination of exces- 
sive profits, if a retroactive upward price revision is anticipated and the esti- 
mated amount thereof is substantial, there will be included in the renegotia- 
tion agreement a clause providing that any amounts thereafter received or 
accrued by the contractor as a result of such price revision shall be deemed to 
be additional profits for the fiscal year under review to be eliminated pursuant 
to the act. 

Civ) Whenever more than one price revision allocable in whole or in part to 
the fiscal year under review is pending at the time renegotiation is completed 
for such fiscal year, with downward price revision anticipated under some 
contracts and upward price revision anticipated under other contracts, the pro- 
visions of subdivisions (ii) and (iii) of this subparagraph will be applied to 
the aggregate net downward or upward revision so estimated. 

(v) Section 105 (a) of the act provides, in part, that an agreement may 
include provisions with respect to the elimination of excessive profits likely to 
be received or accrued. Xo similar provision is contained in the act for the 
elimination by order of excessive profits likely to be received or accrued. Ac- 
cordingly, in refund cases not conducted by agreement, it is not practicable to 
make provision for anticipated price revisions as prescribed in subdivisions (ii) 
and (iii) of this subparagraph. In such cases the Board will inform the 
procurement agency of the status of the renegotiation and will request its 
cooperation in effecting prompt completion of any pending price revisions 
allocable in whole or in part to the fiscal year under review. If necessary, in 
the most exceptional cases, at the request of the contractor and the procure- 
ment agency, when excessive profits are determined by order, the Board will 
also determine the portion thereof, if anv attributable to contracts providing 
for price revisions not yet completed. Notwithstanding any other provisions 
of thi* section, when an order is issued before the comnletion of nny nrice 
revision allocable in whole or in part to the fiscal year under review, the Board 
may elect to allocate the amount of such nrice revision not to the fiscal year 
under review but to the fiscal year in which such nrice revision is ooirnlefed. 

(2) Other raxes. Tf. for the fiscal year under review, the contractor sustains an 
^ver-all loss or realizes an amount of n-rofits which is not determined to be exces- 
sive, so that the case is either withheld from ftsQiimment or. if assigned. i« con- 
cluded by the issuance of a clearance (see ?? 1471.1 and 1473.1 of this subchapter), 


and if at such time the receipts or accruals of the contractor for the fiscal year 
under review are subject to adjustment pursuant to contract price adjustment 
provisions applicable in whole or in part to such fiscal year, the following rules 
will apply : If a net upward price revision is reasonably anticipated, the amount 
thereof will be estimated and included in renegotiable sales for the fiscal year 
under review to the extent allocable to such year. If a net downward price 
revision is reasonably anticipated, the amount thereof will be estimated and 
allowed to the contractor as a reduction of renegotiable sales for the fiscal year 
under review to the extent allocable to such year. In either case, if the outcome 
of the pending price adjustment is sufficiently uncertain so that it is believed 
that the contractor may realize additional profits allocable to the fiscal year 
under review by receiving more than the amount of an anticipated net upward 
revision or by not being required to pay the full allocable amount of an antici- 
pated net downward revision, and if the amount of such additional profits is 
considered to be sufficiently substantial to affect the result of renegotiation for 
the fiscal year under review, a determination will be made by the Board of 
the amount of additional profits which the contractor may thereby realize 
without incurring any liability for excessive profits for such year. This will 
be done only when it is considered that by the operation of such contract price 
adjustment provisions the contractor may realize additional profits in an 
amount sufficient to bring its total renegotiable profits for the fiscal year under 
review above the clearance level so determined. Any such case will not be 
withheld from assignment or closed by a notice of clearance, but will be 
assigned and closed by a clearance agreement containing a clause in the form 
set forth in § 1498.2(g) (2) or (4), as the case may be, of this subchapter. 

(3) Different treatment in special cases. Notwithstanding any other pro- 
visions of this section, if the price adjustment provisions of a contract apply 
to the receipts or accruals of the contractor in more than one fiscal year, in- 
cluding the fiscal year under review, the contractor and the Board or Regional 
Board conducting the renegotiation may enter into a special accounting or other 
agreement providing for the effects of the operation of such price adjustment 
provisions in a manner different from that prescribed in this section. 

(4) Forms of clauses for agreement. Forms of clauses which may be used in 
a renegotiation agreement to give effect to the principles stated in this para- 
graph are set forth in § 1498.2(g) of this subchapter. These clauses contemplate 
the existence of several pending price revisions, with downward price adjust- 
ment anticipated in some and upward price adjustment anticipated in others. 
and provide for disposition of the aggregate net downward or upward adjust- 
ment. The clauses should be appropriately modified when only a single price 
revision is outstanding at the time of the renegotiation agreement, or when, al- 
though several price revisions are outstanding, it is anticipated that all will be 
downward or all will be upward. In any case in which the contract price adjust- 
ment provisions apply to the receipts or accruals of the contractor in more than 
one fiscal year, including the fiscal year under review, such clause should be 
modified to limit the application of such clause to that portion of the amount of 
such price revision which is determined to be allocable to the fiscal year under 
review pursuant to the provisions of paragraph (b) of this section.* 

(e) Subcontracts. Subcontracts containing incentive provisions or providing- 
for escalation, redetermination, or other revision of the contract price are subject 
to renegotiation unless otherwise exempted. The principles and procedures 
set forth in paragraphs (b), (c), and (d) of this section are intended to apply to 
such subcontracts so that the effects of the operation of the price adjustment 
provisions of a subcontract shall be the same, for purposes of renegotiation, as 
those prescribed in said paragraphs (b), (c), and (d) of this section with respecl 
to prime contracts. For the application of section 1481 of the Internal Revenue 
Code to price redetermination refunds made by subcontractors to prime con- 
tractors or higher-tier subcontractors, see Rev. Rul. 54-82 set forth in § 1499.35 
of this subchapter. The forms of clauses set forth in § 1498.2(g) of this subchap- 
ter will be appropriately modified when used in renegotiation agreements with 
subcontractors who have made such refunds. 

(f) Other price adjustments. (1) Title II of the First War Powers Act. as 
amended, and Executive Order No. 10210 dated February 2. 1951. issued there- 
under, authorize the Secretaries of Defense. Army, Navy and Air Force under 
certain circumstances, and among other things, to amend contracts without con- 
sideration, to correct mutual mistakes in contracts, and to formalize informal 
commitments. Unless otherwise exempted, amounts received or accrued by 


a contractor pursuant to the exercise of such authority are subject to renegotia- 
tion and to the principles and procedures set forth in paragraphs (b), and (c) and 
(d) of this section. 

(2) Public Law 85-804, approved August 28, 1958, provides that "the Presi- 
dent may authorize any department or agency of the Government which exer- 
cises functions in connection with the national defense, acting in accordance 
with regulations prescribed by the President for the protection of the Govern- 
ment, to enter into contracts or into amendments or modifications of con- 
tracts heretofore or hereafter made and to make advance payments thereon, 
without regard to other provisions of law relating to the making, performance, 
amendment, or modification of contracts, whenever he deems that such 
action would facilitate the national defense. The authority conferred by this 
section shall not be utilized to obligate the United States in an amount in excess 
of $50,000 without approval by an official at or above the level of an Assistant 
Secretary or his Deputy, or an assistant head or his deputy, of such department 
or agency, or by a Contract Adjustment Board established therein." Unless 
otherwise exempted, amounts received or accrued by a contractor pursuant to the 
exercise of such authority under a contract with one of the Departments 
named in or pursuant to section 102(a) of the Act, as amended, are subject to 
the procedures set forth in paragraphs (b), (c) and (d) of this section. 
[18 F. R. 3366, June 12, 1953, as amended at 19 F.R. 3766, June 19, 1954; 
19 F. R. 5376, Aug. 24, 1954, 19 F. R. 7434, Nov. 18, 1954 ; 22 F. R. 7638, Sept. 26, 
1957 ; 23 F. R. 8515, Nov. 1, 1958 ; 27 F. R. 623, Jan. 20, 1962 ; 33 F. R. 17785, 
Nov. 28, 1968] 

Appendix G 
(Selected Regulations of the Renegotiation Board) 
§ 1460.1 General considerations. 

In making determinations in renegotiation, the Board will proceed generally 
as follows : 

(a) All the information necessary to a sound determination will be obtained. 

(b) The contractor will be given an opportunity to develop and present what- 
ever information is available to it which the contractor may consider pertinent 
to the determination. 

(c) Requests for additional information and the number of meetings held 
with the contractor or its representatives will be kept to a minimum. 

(d) Financial and factual information will be reviewed with the contractor 
and its agreement to the accuracy of such information will be obtained. 

(e) The contractor will be given every reasonable assistance and all neces- 
sary information with respect to the technical requirements of renegotiation, the 
act, and the regulations in this subchapter. 

(f ) The facts and conclusions with respect to the contractor's business will be 
fully developed. 

§ 1460.2 Specific considerations. 

(a) Profits before taxes. In renegotiation the amount of excessive profits is 
determined before provision for Federal taxes on income. In determining the 
existence or amount of excessive profits, the effect of Federal income taxes on 
the retained profits will not be considered. 

(b) Separate consideration of certain types of contracts. While renegotiation 
will be conducted with respect to the aggregate of the contractor's renegotiable 
business for the fiscal year, separate consideration will be given to cost-plus-a- 
fixed-fee contracts and other cost-type contracts and to contracts, whether fixed 
price or cost-plus-a-fixed-fee, which contain incentive provisions or provide for 
escalation, redetermination, or other revision of the contract price during the life 
of the contract. Patent royalty income will also be separately considered. 

(c) Comparisons. In evaluating the contractor's performance, comparisons will 
be made with the prices, costs and profits of other contractors engaged in the 
production of the same or similar products or using the same or similar processes. 

(d) Significance of settlements or profits or losses in prior years. Renegotiation 
settlements for prior years are not controlling precedents. Consideration will be 
given to profits or losses in prior years only to the extent provided elsewhere in 
these regulations. Except to that extent, determinations of excessive profits will 
be predicated on the facts and circumstances of the year under review. 


(e) Reserves for possible renegotiation refunds. It is recognized that sound 
accounting principles may make it desirable for contractors to establish reserves 
for possible renegotiation refunds and that the amount of such reserves estab- 
lished in individual situations will vary widely depending upon the policy of 
the particular contractor concerned. Neither the existence nor the amount of 
such reserves is to be considered directly or indirectly in connection with the 
determination of excessive profits. The Board recognizes that conservative prac- 
tice may result in setting up such reserves in excess of the anticipated liability 
and will not permit such a practice to prejudice the contractor in any way. 

§ 14G0.8 Application of statutory factors. 

(a) General policy. Reasonable profits will be determined in every case by 
overall evaluation of the particular factors present and not by the application 
of any fixed formula with respect to rate of profit, or otherwise. Renegotiation 
proceedings will not result in a profit based on the principle of a percentage of 
cost. Contractors who sell at lower prices and produce at lower costs through 
good management, including conservation of manpower, facilities and materials, 
imporved methods of production, close control of expenditures, and careful pur- 
chasing will receive a more favorable determination than those who do not. Such 
favorable or unfavorable determination will be reflected in the profits allowed 
to be retained by the contractor or subcontractor as nonexcessive. Claims of a 
contractor for favorable consideration must be supported by established facts, 
analyses, and appropriate comparisons. This section and the following sections of 
this part apply to all contractors except those whose renegotiable contracts con- 
sist only of subcontracts described in section 103(g)(3) of the act. For the 
application of the statutory factors to such subcontractors, see Part 1490 of this 

(b) Considerations affecting small contractors. Characteristics inherent in the 
operation of a small company, if shown to be relevant in a particular case, are 
taken into consideration by the Board in applying the factors described in 
section 103(e) of the act. For example, under the efficiency factor, it may be 
shown that a small contractor, through greater flexibility, was able to schedule 
and complete the performance of a contract more expeditiously than his larger 
competitors, or that by closer personal supervision he achieved lower costs or a 
better product. Under the risk factor, the small contractor undertaking renegoti- 
able production unrelated to his ordinary commercial business may be shown to 
have been endangered to a greater extent than larger contractors by the possible 
cancellation of the Government program. Considerations of company size may also 
affect the application of other factors. 

[17 F. R. 2529, Mar. 25, 1952, as amended at 36 F.R. 5848, Mar. 30, 1971] 
§ 1460.9 Efficiency of contractor. 

(a) Statutory provision. Section 103 (e) of the act provides that in determining 
excessive profits, favorable recognition must be given to : 

"the efficiency of the contractor or subcontractor, with particular regard to attain- 
ment of quantity and quality production, reduction of costs, and economy in the 
use of materials, facilities, and manpower" ; 

(b) Comment. Favorable recognition must be given to the contractor's efficiency 
in operations, with particular attention to the following : 

(1) Quantity of production ; for example, in relation to available physical facili- 
ties : meeting of production schedules ; expansion of facilities ; maximum use of 
available production facilities. 

(2) Quality of production: for example, maintenance of standards of quality ; 
rejection record: reported mechanical or other difficulties in the use or installa- 
tion of the product. 

(3) Reduction of costs ; for example a decrease in costs per unit of production 
or per unit of sales as between fiscal years and as compared with other contractors 
producing the same or similar products when the operations are reasonably com- 
parable: a decrease in administrative, selling, or other general and controllable 
expenses; a decrease in prices paid vendors for purchased materials and subcon- 
tracted items or units. (See § 1400.10 (b).) 

(4) Economy in the use of materials facilities, and manpower: for example, a 
decrense in quantity of materials used in relation to production and the number 
of employees in relation to production ; reduction of waste. 

(5) Nature and objectives of incentive and price redeterminable contracts and 
subcontracts: with respect to such contracts or subcontracts, in winch the con- 
tract prices are based upon estimated costs, the Board will take into consideration 


the extent to which any differences between such estimated costs and actual costs 
are the result of the efficiency of the contractor. To enable the Board to give 
such consideration, the contractor may, and if requested by the Board, shall fur- 
nish on an aggregate or unit basis (i) a breakdown of the estimated costs upon* 
which the prices of such contracts or subcontracts were based, together with the 
amounts thereof applicable to the fiscal year under review, and (ii) a correspond- 
ing breakdown of the costs actually incurred on such contracts or subcontracts or 
which the contractor estimates will actually be incurred thereon together with 
the amounts thereof applicable to the fiscal year under review as reported in the 
Standard Form of Contractor's Report or other financial data filed by the con- 
tractor with the Board with respect to the fiscal year under review ; and the con- 
tractor shall also furnish an explanation, in such form and detail as may be ap- 
propriate, of the reasons for any variances between such breakdowns or between 
particular cost elements itemized therein, with particular reference to the extent 
to which such variances are attributable to the performance of the contractor in 
the fiscal year under review or to other events occurring in such year. The Board 
will consider and give due regard to the views of the contracting agencies in con- 
nection with the foregoing. Insofar as the efficiency of the contractor may be ap- 
praised by analysis of the cost elements set forth in such breakdowns, the Board 
will observe the following principles : 

(a) The Board will consider separately those elements of cost which are wholly 
outside the control of the contractor and those which the contractor wholly or 
partly controls. 

(6) The fact that the realized costs are less than original estimates will not 
necessarily be construed to mean that the contractor has demonstrated efficiency, 
nor will realization of actual costs in excess of the original estimates necessarily 
be construed to mean that the contractor has been inefficient. 

(c) If the original cost estimates include provision for any contingency which 
has not materialized and is no longer expected to occur, the contractor will be 
expected to submit information indicating whether the elimination of such con- 
tingency resulted from the efficiency of the contractor or whether the circum- 
stances were such as substantially to eliminate the risk provided against in the 
original cost estimates. 

[17 F.R. 2529, Mar. 25, 1952, as amended at 23 F.R. 2279, Apr. 8, 1958] 
§ 1460.10 Reasonableness of costs and profits. 

(a) Statutory provision. Section 103 (e) of the act provides that in determin- 
ing excessive profits there shall be taken into consideration the following factor : 

(1) Reasonableness of costs and profits, with particular regard to volume of 
production, normal earnings, and comparison of war and peacetime products ; 

(b) Comment. (1) Consideration w T ill be given to the reasonableness or the 
excessiveness of costs and profits of the contractor. Comparisons will be made 
with the contractor's own costs and profits in previous years and with current 
costs and profits of other contractors, if such information is available. In com- 
parisons, uncontrollable variations in labor, material, or other costs will be taken 
into account. Particular attention will be given to relative changes in control- 
lable costs such as selling and general administrative expense. Low costs with- 
relation to other contractors, when clearly established and shown to be the 
result of efficiency in management, are especially significant and must receive 
favorable consideration. Under no circumstances, except as provided in § 1457.8 
or § 1457.9 of this subchapter, will the contractor's porfits or losses on rene- 
gotiate business in years other than the year under review be used as an account- 
ing offset or adjustment in the determination of excessive profits for the year 
under review. 

(2) Consideration for comparative purposes will be given to profits of the 
contractor, and of the industry, on products and services not subject to renego- 
tiation, especially in cases in which the renegotiable business involves products 
or services substantially similar to those not subject to renegotiation. In making 
comparisons for fiscal periods before those subject to the act, profits during 
World War II years will not be regarded as determinative. If the renegotiable 
business is not fundamentally different from the non-renegotiable business and 
if the product is sold and distributed by the contractor's normal channels and 
methods, the profit margin on non-renegotiable business is significant in 

(3) Favorable consideration will be given to an increase in volume of pro- 
duction for defense purposes. On the other hand, when the Government's de- 
mand has enabled the contractor to increase his sales without exceptional effort 
and without corresponding increases in costs, decreased unit costs result, and 


the Government should normally get the principal benefit in more favorable 
prices, or in renegotiation. In many cases, the contractor may establish that 
factors related to the increased volume, such as developmental contribution, 
added risk assumed, or added investment of capital, entitle the contractor to 
claim a larger share of the benefit resulting from increased volume, but to 
the extent that this is not shown, the margin of profit on expanded renegotiate 
sales should be adjusted in reasonable relationship to the expanded volume. In- 
crease in volume made possible by increased subcontracting may often not involve 
any cost savings, and will involve problems discussed under other factors. See 
§§1460.12 and 1460.14. 

(4) When the contractor is engaged in more than one class or type of busi- 
ness, the varied characteristics of the several classes of business will be taken 
into consideration. 

(5) The Board will give consideration to certain situations where a contractor 
had deficient profits on renegotiate sales in a year or years prior to that under 
review. Where it can be established that deficient profits in prior years resulted 
from nonrecurring costs in the early stages of production which relate to pro- 
duction in the year under review, the Board will take this into account in re- 
viewing the contractor's renegotiate business in the year under review. Thus, 
for example, labor costs and a proper proportion of the related overhead may 
be high in the early stages of production because of ( i ) excessive defective work 
resulting from inexperienced labor, (ii) idle time and subnormal production oc- 
casioned by testing and changing methods of production, or (iii) the cost of 
training employees. There may also be high material costs due to abnormal 
scrap losses. Further, there may be instances where deficient profits resulted 
in prior years from expenses incurred in the design of a product or of special 
tooling, in the planning of production processes and layout, or in the rearrange- 
ment of the contractor's plant, when incurred for a renegotiable contract or 
contracts. Circumstances such as those set forth herein which can be present 
under a long-term contract can also be equally present in the case of a series of 
two or more short-term successive contracts for the production of the same or 
similar items. In evaluating the extent to wmich matters such as these should 
be taken into account, the Board will consider the reasonableness of the man- 
agement practices followed. 

[17 F.R. 2529, Mar. 25, 1952, as amended at 21 F.R. 7440, Sept. 28, 1956; 36 
F.R. 18395, Sept. 14, 1971] 

§ 1460.11 Capital employed. 

(a) Statutory provision. Section 103 (e) of the act provides that in determin- 
ing excessive profits there shall be taken into consideration the following factor : 

(2) The net worth, with particular regard to the amount and source of public 
and private capital employed ; 

(b) Comment. (1) The amount of net worth employed, as well as the amount 
and source of capital employed, will, as a general rule, be that existing at the 
beginning of the fiscal year. However, if significant changes, in either capital or 
net w T orth, occur during the year, they will be reflected in the determination of 
the amount employed during such year. In determining net worth and capital 
employed, the Board will consider book values, and will disregard amounts 
arising from revaluations. 

(2) The amount of net wwth employed in renegotiable business will be esti- 
mated and considered whenever a reasonable estimate of that amount is pos- 

(3) Capital employed is the total of net worth, debt, and any assets furnished 
by the Government or customers not contained in the contractor's records. The 
source of capital will be established in order that a determination may be made 
of the extent to which capital employed in renegotiable business came from 
public sources or from customers, or was furnished by the contractor. 

(4) The relationship of profit realized on renegotiable business to the capital 
and net worth employed in renegotiable business will be used as one of the eon* 
sidcrations in the final determination of what constitutes excessive profit. A 
contractor who is not dependent upon Government or customer financing of 
any type is entitled to more favorable consideration than a contractor who Is 
largely dependent upon these sources of capital. When a large part of the capital 
employed is supplied by the Government or by customers, the contractor's contri- 
bution tends to become one of management only and the profit will be considered 

[17 F.R. 2529, Mar. 25, 1952, as amended at 34 F.R. 436, Jan. 11, 1969] 


§1460.12 Extent of risk assumed. 

(a) Statutory provision. Section 103 (e) of the act provides that in determin- 
ing excessive profits there shall be taken into consideration the following 
factor : 

(3) Extent of risk assumed, including the risk incident to reasonable pricing 
policies ; 

(b) Comment. (1) The risks to be considered include but are not limited to 
risks incident to close pricing policies. For example, contractors in certain in- 
dustries may attain maximum production only at the risk of saturating post- 
emergency markets. Contractors may assume risks by guaranteeing delivery 
schedules notwithstanding possible inability to obtain needed materials or labor. 
Contractors may guarantee quality and performance of the product notwith- 
standing uncertainties as to the quality obtainable from their plants, particu- 
larly with respect to products which may be more or less abnormal to them. 
In some cases a substantial degree of risk will be found in the temporary sacri- 
fice of civilian markets to competitors, in order to accept more defense orders, or 
in the certainty of heavy reconversion expenses at the end of the emergency. 
Acceptance of contracts without escalation or similar protection may involve a 
risk that the cost of labor or materials may increase. Contractors who subcontract 
work, the performance of which they guarantee, in general assume a greater risk 
than contractors who retain performance entirely within their own control. In 
general, the Board will consider whether the contractor's performance of renegoti- 
able business is free from risk, or subject to it, on the basis of actual experience 
and not more speculative or unlikely possibilities. The Board will give special con- 
sideration to evidence showing risks through actual realization of losses incurred 
by the contractor in performing contracts in other years similar to the contracts 
undergoing renegotiation, and losses incurred in the same or other years by con- 
cerns other than the contractor, especially when connected with the contractor 
in any way, and in performing similar contracts. 

(2) The risk assumed by the contractor as a result of its pricing policy will 
be given particular consideration. A contractor, having initial prices calcu- 
lated to yield a reasonable profit, who revises such initial prices downward peri- 
odically when circumstances warrant, will be given more favorable treatment 
under this factor than a contractor who does not follow such policy. In order 
that proper consideration may be given, it is suggested that contractors, when 
making such periodic price revisions, notify the Board of the action taken in 
this respect. 

(3) Consideration of the pricing policy of the contractor frequently involves 
the question of refunds made before renegotiation under the act. As stated in 
Part 14f>2, such refunds may be made as an integral part of the repricing 
policy of the contractor or as prepayments of excessive profits. In either event, 
the effect upon the risk assumed by the particular contractor depends entirely 
upon the facts of each case, including the manner in which the refund is made. 
For example, a contractor who executes a legally binding agreement to pay the 
Government a rebate on articles delivered during a particular period of time, 
has incurred a greater risk than a contractor who gives the Government a non- 
binding "statement of intention" or "statement of policy" indicating that it will 
make refunds, even though the final profit position of the two contractors at the 
end of the fiscal year is the same. On the other hand, a contractor who makes a 
refund pursuant to such a "statement of intention" or "statement of policy" may 
have incurred a greater risk than one who simply makes a refund. Similarly, a 
contractor who makes a refund near the beginning of its current fiscal year 
has incurred a greater risk than one who makes a refund near the end of its 
fiscal year. The effect of the refund must, therefore, be weighed in the light of 
all pertinent facts. 

§ 1460.13 Contribution to the defense effort. 

(a) Statutory provision. Section 103 (e) of the act provides that in deter- 
mining excessive profits there shall be taken into consideration the following 
factor : 

(4) Nature and extent of contribution to the defense effort, including inven- 
tive and developmental contribution and cooperation with the Government and 
other contractors in supplying technical assistance. 

(b) Comment. Every contractor contributes to the defense effort when he per- 
forms or assists others to perform a defense contract or subcontract, or when, 
in connection with such a contract or subcontract, he otherwise renders a service 
of value to a defense program or objective. Credit will be given under this factor, 
in such degree as the facts may warrant, for (1) superior performance in 


excess of contract requirements, such as completion of urgent work ahead of 
schedule at the request of the procuring department, or exceeding specifications 
in a manner beneficial to the defense effort; (2) ingenuity in providing now uses 
for products or production machinery or equipment; (3) overcoming difficulties, 
which others have failed to overcome, in providing materials or services for the 
defense effort; (4) experimental and developmental work of high value to the 
defense effort; (5) new inventions, techniques, and processes of unusual merit : 
(6) performance under difficult environmental or geographical conditio:,: or 
hazardous working conditions; (7) cooperation with the Government and with 
other contractors in contributing proprietary data or in developing and supplying 
technical assistance to alternative or competitive sources of supply; or (8) 
performance, assistance, or service considered otherwise exceptional. 
[38 FR 6390, Mar. 9, 1973] 
§ 1460.14 Character of business. 

(a) Statutory provision, Section 103 (e) of the act provides that in deter- 
mining excessive profits there shall be taken into consideration the following 
factor : 

(5) Character of business, including source and nature of materials, com- 
plexity of manufacturing technique, character and extent of subcontracting, and 
rate of turnover. 

(2) Comment. (1) Consideration will be given to the character of the business 
of the contractor. The manufacturing contribution will vary with the nature of 
the product and the degree of skill and precision required in the work performed 
by the contractor. The relative complexity of the manufacturing technique and 
the relative integration of the manufacturing process are the basic considerations 
in evaluating this factor. 

(2) A contractor who uses customer-furnished materials generally is not en- 
titled to as large a dollar profit as the dollar profit to which such contractors 
would have been entitled had it furnished the materials itself. In the latter case, 
the contractor would have expended effort in finding or acquiring the materials, 
would have assumed the risk of obsolescence, spoilage, or other loss inherent in 
owning such materials. Although the aggregate dollar profit allowed the contrac- 
tor in the former case should not be as great as it would be if such contra cror 
furnished its own materials, nevertheless the dollar profit allowed will usually 
result in a larger percentage of sales than the dollar profit which would have 
been purchased by the contractor and, therefore, included in its sales and costs. 

(3) (i) Defense production needs and the policy of Congress require that sub- 
contracting, particularly to small business concerns, be used to the maximum 
extent practicable. Although a contractor who subcontracts work may not rea- 
sonably expect to be allowed as large a profit thereon as if it had done the work 
itself, subcontracting of the kind described in this subparagraph, especially the 
extent to which subcontracts are placed with small business concerns, will be 
given favorable consideration in the renegotiation of the contractor. 

(ii) A contractor will ge given favorable treatment when, by subcontracting, 
it utilizes in the defense effort facilities and services, particularly of small busi- 
ness concerns, which might otherwise have been overlooked or passed by ; when 
it has demonstrated its efficiency and ingenuity in finding appropriate oppor- 
tunities for subcontracting ; when the amount of subcontracting so accomplished 
is substantial; when the amount or complexity of technical, engineering and 
other assistance rendered by the contractor to the subcontractor is substantial : 
and when the price negotiated with the subcontractor is reasonable in view of 
the character of the components produced. 

(iii) The portion of the renegotiate business of the contractor which is sub- 
contracted will be a part of its total sales, and separate consideration must be 
given in applying to this portion the factors of risks assumed, capital employed, 
and reasonableness of costs and profits. 

(iv) The subcontractor, of course, will receive favorable consideration in 
renegotiation for the successful employment of its own facilities and production 

(4) The rate of turn-over will indicate the use of plant, materials, and net 
tvorth. A low rate of turn-over may indicate more complete integration in pro- 
duction or may be related to the type of the product and the nature of the manu- 
facturing process. A high rate of turnover may indicate a relatively smaller 
manufacturing contribution or. by comparison with other manufacturers of 
similar products, a relatively greater efficiency. 

[17 F.R. 2529, Mar. 2, 1952, as amended at 21 F.R. 74-10, Sept. 28. 1956] 



3 1262 09112 5046